Thirty Year Retread
What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]
Japan’s prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America’s new CiC in the somewhat ostentatiously appointed Trump Tower. They look happy.
Photo credit: Reuters
Looming Currency and Liquidity Problems
The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into account.
USD-CNY, the onshore exchange rate of the yuan vs. the USD. After years of relentless appreciation, the yuan topped in early 2014 and has weakened just as relentlessly ever since. The yuan’s top coincided with the beginning of the “tapering” of the Fed’s QE3 debt monetization program and the peak in China’s foreign exchange reserves at just below $4 trillion. There was practically no lead time involved, which is rare. Although the yuan is not convertible and therefore by definition a “manipulated currency” (is there a fiat currency that isn’t manipulated?), the assertion that China’s authorities are deliberately weakening the yuan is erroneous. The opposite is true: they are trying to keep it from falling or are at least trying to slow down its descent with every trick in the book (every intermittent phase of yuan strength since the beginning of the decline was triggered by intervention). Understandably so: due to the close correlation between the level of forex reserves and credit and money supply growth in China, a rapid depletion of reserves is likely to impact the country’s giant credit bubble. One of the moving parts in this equation are bank reserve requirements, which the PBoC essentially uses to control the extent of credit growth triggered by the accumulation of reserves (a.k.a. “sterilization”). These peaked at 21.5% in June 2011 and were since then lowered to 17% to keep domestic credit expansion going – click to enlarge.
BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp.
What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best bet: Sell stocks and bonds (debt). Buy GDP. How? To be addressed in due course.
SGG! The “something’s gotta give” chart: total US credit market debt, federal debt, the Wilshire Total Market Index an GDP. Unless something gives, we will need a microscope in a few years in order to detect GDP on this chart. Consider also that GDP has been “upgraded” numerous time in recent decades, most recently less than two years ago (these upgrades involve adding hundreds of billions of dollars to economic output no-one has ever spent or received – they are merely statistical artifacts. It is slightly different with debt; we can simply count that) – click to enlarge.
Chasing Entry Points
Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn’t a correction set in soon and provide you with a more favorable buying opportunity?
Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 – an example that illustrated the general principle discussed here quite well. We could of course have picked another stock or an index future, but AAPL was convenient on account of the earnings beat it announced on the preceding evening, which triggered relentless buying pressure over most of the trading day [PT] – click to enlarge.
There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.
One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes’ nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ – in fact, similar to Marx’ Das Kapital, it has done permanent damage. We have to admit that we have read it ourselves (and what a slog it was!) – contrary to Keynes himself, who once published a scathing critique of Mises’ Theory of Money and Credit without reading even one word of it, we prefer to actually read what those we criticize have published. In the first German edition of the book, Keynes freely admitted that his policy recommendations were probably more useful for a totalitarian State than a free society (i.e., it would be easier to implement them, because of their coercive nature). The biggest problem is though that most of the book is a rehash of hoary inflationist ideas that were already long refuted by the time of its publication. The handful of original ideas Keynes contributed didn’t constitute good economic theory either. Moreover, the book is riddled with contradictions and is an extremely tedious read to boot. At best we can recommend it as symptomatic treatment for insomnia. However, it did provide the State with a pseudo-scientific fig leaf for central planning and interventionism, which in turn provides thousands of mediocre economists with an income. This is the reason why it was and continues to be praised to the rafters by assorted etatistes. It is at this point that we are often reminded by people (who usually haven’t read it) that “not all the ideas in the book are bad”. Well, you don’t have to take our word for it. If you don’t want to go through the painful effort of reading it, you might want to look at Henry Hazlitt’s detailed critique instead, which is available for free here: The Failure of the “New” Economics (pdf). It is the only way to have fun reading Keynes’ book. Hazlitt is taking it apart mercilessly with impeccable logic. In addition, he provides the reader with a few enlightening excursions, such as e.g. a disquisition on mathematical economics that is one of the best take-downs of this barren, physics envy-driven, pseudo-intellectual wanking we have ever seen.
India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to.
A Simple Formula
MIAMI – How do we know if new programs will make the economy better… or worse? Here’s a simple formula:
W = rv (w-w – w-l)
That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it… except the essential heartwood.
When devising a win-win, be careful not to let it go bad-bad.
BALTIMORE – Last week, Team Trump made its triumphant march into Washington. The president-elect paid his respects at the Tomb of the Unknown Soldier, admired his new hotel in Washington, and quipped that his cabinet had the highest IQs of any on record.
We’re over here! Too brainy for our skulls! We don’t know whether the new cabinet’s proximity to Einstein has actually been measured, but from experience we caution that seemingly high intelligence often doesn’t keep people from being morons (there is a long list of high IQ morons considered to be members of the intelligentsia). That said, the Donald himself is certainly a lot sharper than many people give him credit for; his judgment on the matter should probably be given the benefit of the doubt… – click to enlarge.
Awesome Forecasts and the Unknowable Future
Back in late 2013 I wrote a piece on human nature which was in part inspired by the bullish exuberance exhibited by a MarketWatch article predicting the DJIA at 20,000 in the near term future. Yesterday afternoon, a bit over three years later, that prediction actually became reality and I’m sure the author of that article as well as many other like minded traders popped some champagne in celebration of their awesome ability to predict the future.
A trader from the (near) future.
Image via tumblr.com
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