Posts Tagged ‘deflation’

     

 

 

Inflation: An Expansion of Counterfeit Credit

The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system.

Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience.  The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket.

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Japan's Scary Budget

While all over Europe, governments are forced to face up to the fact that the markets have suddenly become alert to the dangers posed by the huge debt loads carried by modern-day welfare states, Japan's government just piles on more and more debt on its existing debtberg with seeming impunity.

In Italy, Mario Monti's 'honeymoon' is already over. He just passed a fairly strict 'austerity' budget (recently denounced by the Northern League as a 'recessionary budget' – and rightly so, as it leaves the bulk of spending untouched and mostly imposes new taxes), but Italian bond yields are already back on the rise.  Note here as an aside that the current level of the yield on Italy's 10 year note is not directly comparable to the time when a similar level was first reached, as the benchmark bond used by data providers has in the meantime been changed to a higher-yielding one – alas, it is the direction in which yields are heading that is relevant. Monti's real fight meanwhile is still ahead – he will have to challenge powerful vested interests as he attempts to implement structural reform.

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Central Bank Pumping Expectations

Not only is the ECB expected to deliver fresh easing measures when it meets on December 8, but we are now getting rather precise forecasts as to the expected size of the upcoming 'QE3' MBS monetization program by the Fed as well.

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A Paucity of Imagination

We want to return to a theme we have recently discussed in these pages, namely the allegedly exhaustive hypotheses regarding the possible solutions to the euro area's problems that are regularly presented to us in the media.

Leading intellectuals and economists usually list a set of choices based on the views of the current economic orthodoxy, which choices they insist are all that is possible or even imaginable.

We have briefly mentioned the topic last week and so has Mish in a recent post that similar to our article looked critically at Martin Wolf's recent 'Thinking the Unthinkable' editorial at the FT.

The main problem from our point of view is of course that no-one in the mainstream has as of yet really given voice to the so-called 'unthinkable', which in a way demonstrates what it really consists of (if it weren't 'unthinkable', they would have thought of it).

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The FOMC Decision – Some Advance Kremlinology

We have tried to get an idea of what to expect from the FOMC on Wednesday, but must admit we couldn't really make up our mind. One line of argument  goes 'Ben Bernanke will try to shock the markets by doing much more than most people currently expect'.

This line of thinking has been ably laid out by David Rosenberg of Gluskin Sheff (the details are available at Zerohedge) and Bill Fleckenstein (details at MSN Money).

Both Rosenberg and Fleckenstein are quite capable analysts of the economy and financial markets, so it is certainly worth considering what they are saying.  Here is what we like about their idea, aside from the reasons they have laid out themselves: First of all, it is notable for being a minority view at the moment. This is at least our opinion from observing anecdotal evidence and a recent Bloomberg survey confirms that the vast majority of economists expects 'only' a variation of 'Operation Twist' ('OT') to be announced, whereby the Fed will simply alter the term structure of its balance sheet by selling shorter term and buying longer term debt. The aim would be to lower long term interest rates (this is to say, the operation would tend to flatten the yield curve).  

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More Inflation Please!

The world is waiting with bated breath for the annual gathering of monetary cranks at Jackson Hole, as depicted here by William Banzai7. The most closely observed speech will be that of the bearded wonder, that 'expert on the Great Depression', Ben Bernanke, the world's foremost money helicopter pilot. The man who alternately is, or isn't printing money, depending on the year in which you ask him about it.

Will he or won't he shower us with more monetary heroin? Wounded stock market  bulls would dearly like to know (mostly, they want to know when, see further below). Since Bernanke used last year's gathering at Jackson Hole to prepare the markets for the policy failure known as 'QE2', it is widely hoped that he will once again rise to the occasion and promise more inflation.

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 … but it stands on a weak foundation.

The expected rebound in stocks and commodities has continued on Monday, but there are a number of signs that this is not much more than a short covering rally that is unlikely to last. Although yields on euro area government bonds and CDS on them have continued to decline (we will update the euro area charts tomorrow), the fact remains that the economy is under pressure, so bounces in stocks have to be approached with great caution – they are more likely to represent selling opportunities than a reason to buy at this stage. Notably the recent rally has inter alia been triggered by a short selling ban in several European countries. Short selling bans have historically always been medium term bearish events – they can trigger a bounce lasting for a few days, but in the long run they are extremely counterproductive, as they lower liquidity and hinder the price discovery process. By taking away the opportunity to hedge, they ultimately create even more selling pressure than would have appeared otherwise. This latest short selling ban is thus likely destined to fail as well – one wonders why the authorities even bother.

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Markets Post FOMC  –  The Rebound Begins

Today's FOMC statement was widely expected to contain some announcement that would help to 'stabilize the markets', but we would note that it contained actually no such thing. The market was so severely oversold that it would have  rebounded soon anyway – whether on Tuesday or on Wednesday was not really  very relevant.

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A Hampered Market Economy

It would be incorrect to refer to the euro area or the EU more broadly as a planned economy. It clearly is a market economy, but just as clearly, it is not an unhampered one. Unfortunately for economic actors both in their role as producers and consumers, the hampering of the economy in the EU is in a very advanced state.

It has become commonplace to hear European politicians attempting to pin the blame for the euro area's debt woes on 'speculators'. We previously remarked on the prime minister of Italy, Silvio Berlusconi, who refers to financial market participants as 'locusts'.

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Just a Flesh Wound

'Doctor, how am I? Tell me the truth.'

'Well, you have a mild case of cardiac arrhythmia, your cholesterol is about thrice of what it should be, your blood pressure is off the scales, and if I'm not mistaken, there's a spot of beginning, how shall I put it? Kidney and liver failure. Alas, unless your heart actually stops beating, I think you'll be fine. Of course that brain tumor might get you as well, but a committee of doctors is currently busy solving that particular problem, so we can safely ignore it for the time being. As causes of death go, it's too improbable anyway, right? I therefore pronounce thee to be in ruddy health. Take two aspirin and call me tomorrow.'

 

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Free Money in Temporary Abeyance

Yesterday's FOMC statement can be read in its entirety here. Just as we noted yesterday, it contained no surprises. Essentially it was a carbon copy of its predecessors, although it adopted – not unexpectedly – a somewhat more cautious tone regarding the state of the 'recovery'. And yet, in spite of there not being any surprises, the stock market initially registered its disapproval by declining. The sell-off accelerated markedly when Ben Bernanke began his post meeting press conference. A video of the press conference is available here.  On Thursday,  the market once again sold off, only with even more gusto at first.

 

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A Crescendo Of Bearish News – Silver Hits First Area Of Support

The action in the precious metals space has been so fast-moving this week that updates are usually out of date the moment they are written, but we feel nonetheless compelled to comment once again, as the action in silver and gold is probably of great interest to our readers.

 

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Most read in the last 20 days:

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  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
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  • Rise of the Japanese Androids
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  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
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