Thursday, 19 September 2013

QE And Boom Forever!

Baltic Dry Index. 1822 +82

LIR Gold Target by 2019: $30,000.  Revised due to QE programs.

There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

J. K. Galbraith

The Bernanke Fed just blinked. Faced with the choice of living up to its May leak to a Wall Street Journal hack about coming QE tapering, cutting the throats of their Wall Street cronies in the process, and punting tapering off to the future under Mrs Yellen next year, “the Bernank” took the easy way out. It’s to be QE and stock market and commodities boom forever.  Of course “boom forever” is never forever, and this one won’t be either. It’s just that Dr. Bernanke has ordered it to go on for several months more. When the Fed’s final bubble eventually bursts, the global wealth destruction will just be all the greater. But for the immediate future, the “dead men” of the BRICs and Club Med get a reprieve. Tomorrow will not be like today, which was like yesterday. Tomorrow, when it eventually arrives, will be either the Fed’s final bubble bursting in multiple Lehman’s, or if Mrs Yellen opts for QE to infinity and beyond, the death of the Great Nixonian Error of fiat money, with the death of the fiat dollar reserve standard and the arrival of the Great Inflation.

The Bernank is getting out of Dodge in January, heading off to the hills. The wise will get going with him. 2014-2020 is ugly and getting uglier with each passing month. With QE delivering less bang with each passing month, even Mrs Yellen will find out the QE has unpleasant limits. But old “loose lips” Bernanke has just confirmed what I have long feared. QE programs can’t be ended without triggering the crash they were started to avoid. Messrs Greenspan and “the Bernank” have managed to outdo the infamous John Law. A reserve of fully paid up physical precious metals is now more vital than at anytime in the last 100 years.  Many are already too poor to be able to act prudently. Many are too blinded by the incredible wonders of the present. and the fairy tale promises of banksters and politicians. For the others, it’s time to take out insurance against tomorrow.

“But it (the boom) could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”

Ludwig Von Mises

Fed recoils from 1937 tightening error as jobs evaporate

The American economy has shed 347,000 jobs over the past two months, roughly comparable with the rate of loss seen during the Great Recession. It is remarkable that the US Federal Reserve should even have been thinking of phasing out life-support in such circumstances.

The Fed's tough talk has already led to a 140 basis point rise in US 10-year Treasury yields, the benchmark price money for US mortgages and for the world (ex-China). It might as well have raised rates six times.

The shock decision on Wednesday night to put off tapering bond purchases is a recognition of what should have been obvious. Rising mortgage costs and the "tightening of financial conditions" could slow growth, it said. Indeed.

The net loss of jobs over the summer months has been entirely among men, mostly aged 25 to 54 and university educated. The cohort aged over 55 has been growing, so this is not happening because baby boomers are retiring early and happy to grow cantaloupes in Arkansas, or to play golf at Torrey Pines.

The labour "participation rate" dropped to 63.2pc in July, the lowest level since the late 1970s. The rate for men is at an all-time low. The unemployment rate has been falling, but chiefly because so many people are giving up hope and dropping off the rolls.

Some Fed governors seem to want to wash their hands of this, latching on to theories that the problem is "structural": due to evolving technology, or a "skills mismatch", or that catch-all concept "demographics". No doubt this is half true, but such claims were made in the early 1980s when jobs were scarce. The unemployed were decried as "shirkers" by the Chicago Tribune in the 1930s.

Fortunately the hawks did not prevail. It is likely that vice-chair Janet Yellen played a key role, insisting that the jobless rate is nowhere near the "NAIRU" (non-accelerating inflation rate of unemployment) inflexion point, the level at which inflation starts to accelerate, the gauge she tracks as her lodestar.

Labour specialists say chronic lack of demand in the US is the real villain is this jobs slump. "The problem is not that the labour market is under performing; it is that the recovery has been very slow," says Stanford's Edward Lazear. A record 20.2pc of US households are now on food stamps. That is how they survive.

Bill Gross ‘Not Braggin’ After Call on Short-Term Treasuries

By Wes Goodman - Sep 19, 2013 6:55 AM GMT
Bill Gross got it right when he recommended short-term Treasuries this week.

“Not braggin’ but what did we tell you,” Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter yesterday.

The Fed unexpectedly refrained from reducing its $85 billion pace of monthly bond buying yesterday, saying it needs more evidence of lasting improvement in the economy. Futures contracts indicate investors are betting policy makers will wait longer before raising their target for overnight lending between banks, benefiting short-term Treasuries, those that are most sensitive what the central bank does with its benchmark.

Vice Chairman Janet Yellen, a supporter of Bernanke’s policies, is the top candidate to succeed him, according to people familiar with the process.

The decision by Summers to withdraw marks the beginning of the Yellen Fed, Gross said in his Twitter post yesterday. Traders will have a “frontend friendly” market for a long time, he wrote, referring to the shortest Treasury maturities

I have witnessed and greatly enjoyed the first act of everything which Wagner created, but the effect on me has always been so powerful that one act was quite sufficient; whenever I have witnessed two acts I have gone away physically exhausted; and whenever I have ventured an entire opera the result has been the next thing to suicide.

Mark Twain

Merkel Rejects Joint Euro Debt, Promises to Stay Hard Course

By Patrick Donahue - Sep 18, 2013 11:32 PM GMT
German Chancellor Angela Merkel told supporters she’ll stand as a bulwark against joint debt in the euro area if she’s re-elected in four days and continue to extract conditions from indebted nations.

Speaking at an election rally of several thousand at a portside warehouse in Hamburg yesterday, Merkel denounced plans that have been supported by the opposition Social Democrats, such as a debt-redemption fund and jointly issued euro bonds to overcome the nearly four-year-old European debt crisis.

“We help each other in the euro area, but we have good reason to help only under conditions -- that other countries bring order to things that are right now not in order,” Merkel told the crowd. “Whether we continue on this path is what you’ll decide on Sunday.”

With polls showing the election tightening, Merkel showcased her stewardship over Germany’s record-low unemployment and her guidance of the country through the debt crisis. Should her Christian Democratic-led bloc fall short of a majority with its Free Democrat coalition partner, Merkel may be forced into a so-called grand coalition with the SPD.

Merkel’s CDU bloc fell a point to 39 percent, while the SPD gained a point to 26 percent, according to an Allensbach survey published yesterday. The poll indicated that neither party has enough votes to form a government with its favored partner.

17 September 2013Last updated at 16:01

Crisis in Greece: PM Samaras sees recovery by 2019

Greek Prime Minister Antonis Samaras has said the debt-ridden country could return to pre-crisis living standards within six years.

"According to most [experts], we will not need a couple of decades, not a couple of generations, but only six years," he said in a speech.

He spoke in Rome before travelling to Brussels to meet EU officials.

International lenders are due to conduct a new audit of Greece, where strikes against cuts are under way.
Doctors began a three-day strike on Tuesday in protest at government plans for hospital mergers.

Teachers went on strike on Monday with thousands attending rallies outside parliament in the capital, Athens, as well as the second city, Thessaloniki.

Greece's economy has shrunk by 23% since 2008, and international lenders expect it to diminish by a further 4.2% this year.

The country has received two aid packages totalling about 240bn euros (£205bn; $321bn) and will need about 10bn euros more to cover a funding gap.

Silvio Berlusconi insists he will stay in politics

Former Italian prime minister says he will not give up leadership of centre-right despite expected expulsion from parliament
Silvio Berlusconi has vowed to stay at the centre of Italian politics despite his expected expulsion from parliament over a fraud conviction, and accused leftwing judges of plotting against him to pervert democracy.

In a long-awaited television address shortly before a Senate committee is expected to take the first step in expelling him, the media magnate made no mention of his previous threats to bring down the left-right coalition government of Prime Minister Enrico Letta because of the conviction.

"I will always be with you, at your side, expelled from parliament or not. It is not the parliamentary seat that makes a leader," the 76-year-old billionaire said. He called for centre-right voters to rally behind the relaunched Forza Italia party, with which he first stormed into politics in 1994.

The supreme court last month confirmed a four-year jail term, commuted to one year, on Berlusconi for a giant fraud at his Mediaset television empire. He is expected to go into house arrest or do community service instead of going to jail.

He seemed to be resigned to being ejected from parliament but said he would not give up his leadership of the centre right, calling for freedom-loving Italians to "wake up … rebel, become indignant, react and make yourself heard"

Italy is not technically part of the Third World, but no one has told the Italians.

P. J. O’Rourke

At the Comex silver depositories Wednesday final figures were: Registered 43.17 Moz, Eligible 119.51 Moz, Total 162.68 Moz.  

Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally doubled over.

Today, Herr Sourkraut gets his comeuppance.

"It is never difficult to distinguish between a German with a grievance and a ray of sunshine”

With apologies to P. G. Wodehouse and Scotsmen.

My grovelling apology to Herr Schäuble

By Ambrose Evans-Pritchard Economics Last updated: September 17th, 2013
German Finance Minister Wolfgang Schäuble has been vindicated.

For my part, I have been wrong about everything. German discipline policies for the eurozone have been a tremendous success. I am ashamed for suggesting otherwise.

As the wise, patient, and always self-effacing Mr Schäuble writes today in The Financial Times, the Euro-sceptics talk and write relentless drivel.

Ignore the doomsayers: Europe is being fixed” is the headline:
The eurozone is clearly on the mend both structurally and cyclically.

What is happening turns out to be pretty much what the proponents of Europe’s cool-headed crisis management predicted. The fiscal and structural repair work is paying off, laying the foundations for sustainable growth. This has taken critical observers aback. It should not have, because, in truth, we have seen it all before, many times and in many places.

Despite what the critics of the European crisis management would have us believe, we live in the real world, not in a parallel universe where well-established economic principles no longer apply.

Mr Schäuble says Germany pulled it off the old-fashioned way earlier this decade, with root-and-branch reform. The UK did it in the 1980s, Sweden and Finland in the early 1990s, Asia in the late 1990s:

The recipe worked then and it is working now, somewhat to the chagrin and bemusement of its numerous critics in the media, academia, international organisations and politics.

In just three years, public deficits in Europe have halved, unit labour costs and competitiveness are rapidly adjusting, bank balance sheets are on the mend and current account deficits are disappearing. In the second quarter the recession in the eurozone came to an end.

Systems adapt, downturns bottom out, trends turn. In other words, what is broken can be repaired. Europe today is the proof.

So there we have it. The problem is solved. How can I not have seen it? How can any of us on this blog thread have missed it?

I apologise for mentioning that unemployment is 27.8pc in Greece, 26.3pc in Spain, 17.3pc in Cyprus, and 16.5pc in Portugal, or for pointing that it would be far worse had it not been for a mass exodus of EMU refugees. Nor was is proper to mention that Greek youth unemployment in 62.9pc. These are trivial details.

I apologise for pointing out that the EU-IMF Troika originally said the Greek economy would contract by 2.6pc in 2010 and then recover briskly, when in fact it contracted by roughly 23pc from peak-to-trough, and will shrink another 5pc this year according to the think-tank IOBE. This slippage is well within the normal margin of error.

I apologise for mentioning that the debt trajectories of Spain, Greece, Italy, and Ireland have accelerated upwards under the austerity plans, and therefore that the policy has been self-defeating.

It was quite uncalled for to point out that Italy’s debt ratio has jumped to 130pc of GDP, or to so suggest that debt cannot keep rising on a contracting nominal GDP bas, and I will wash my mouth soap if I ever utter the words “denominator effect” again. It is shabby to use such cheap language.

I apologise for mentioning IMF studies showing that the fiscal multiplier is three times higher than first thought by EU officials in EMU crisis states, and therefore that the contractionary effects of belt-tightening are far greater than first calculated.

As for using that pious and pretentious Greek word “hysteresis” to suggest that mass unemployment and the collapse of investment in southern Europe has lowered the economic growth trajectory of these countries for years to come, outweighing any of the alleged gains from the EU-imposed reforms: this is just trying to blind good folk with posh talk.

I apologise for suggesting that German reforms under Schröder have been vastly overblown, and that German competitiveness gains have been chiefly the result of a beggar-thy-neighbour wage squeeze at the cost of EMU trade partners. Nor should I have said that a small open economy like Sweden in the 1990s may well be able to tighten its way back to vitality in a the middle of a global boom, but if half Europe does so in unison in a slump, it will inflict carnage.

It was unconscionable of me to say that Germany has locked in a semi-permanent trade advantage over Club Med, or for saying that the trying to close this gap by imposing deflation on the South is impossible because this will play havoc with debt dynamics.

----I apologise personally to Mr Schäuble for calling him a dangerous mediocrity: arrogant, shallow, narrow-minded, provincial, and unscientific in equal degree. This was shockingly rude. It brings shame to Fleet Street.

I should not have questioned his wisdom in thinking it is possible to harmlessly enforce contractionary policies on the South of a single currency zone without offsetting expansion in the North. Events have shown that he has the finest mind in Europe, and a superb grasp of European politics. Moreover, people have seen the light even in Greece, where he is now adored.

I went often to look at the collection of curiosities in Heidelberg Castle, and one day I surprised the keeper of it with my German. I spoke entirely in that language. He was greatly interested; and after I had talked a while he said my German was very rare, possibly a "unique"; and wanted to add it to his museum.

Mark Twain. The Awful German Language. 1880.

The monthly Coppock Indicators finished August:
DJIA: +162 Down. NASDAQ: +189 Up. SP500: +194 Down. Two red flags. Only the “stock market for the next hundred years,” remains optimistic. But will Benny and the boys really cut the stock market’s throat? Answer: No!

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