Category: Obiter Dicta

Improper Fractions

In ‘Risk and Failure in English Business’, his study of the development of eighteenth century Britain, UCL professor Julian Hoppit identifies no less than ten financial and commercial crises to have occurred during its first eight decades, to which a quick glance at the annals allows us to add at least three more over the next two. In the nineteenth century, we can enumerate roughly one such outbreak a decade in Britain alone, with a higher count if we include episodes from the Continent or the fledgling US of A.

To gain a feel for the shockingly contemporary nature of much of this litany of default and defalcation, consider what David Morier Evans had to say about his American contemporaries’ behaviour as far back as 1837:-

The banks, instead of controlling and giving right direction to adventurous enterprise, identified themselves with speculation; descended from their high station as conservators of capital and, while they enriched a few corrupt associations, ruined the community and entailed permanent dishonour on the nation.”

We moderns, however, are in no position to mock the gullibility or primitivism of our forebears since, in the last 35 years alone, we have reeled from side to side of our own Ship of Fools – through the Bretton Woods break up; the oil shocks and secondary banking crisis; the LDC debt disaster; the Plaza-Louvre accords rollercoaster; the Crash of ’87; the S&L tsunami; the implosion of the Japanese ‘Miracle’; the early 90’s property bust; the Tequila Crisis; the Asian Contagion; the Russian bankruptcy and LTCM fiasco; the Tech-Telecom bubble; defaults and devaluations in Latin America, Turkey and Eastern Europe; Enron, WorldCom and the corporate bankruptcy spike; the CDO/sub-prime catastrophe; and, now, yet another period of simmering sovereign debt distress.

Though circumstances differ greatly, it is not hard to find the common denominators in all of this. Principally, we cite the particular legalized violence which is governmental abuse of credit, especially where this either involves, promotes, or relies upon that frightful chimera of corporatism which is fractional deposit banking.

The astute and highly-explanatory observation made by the political philosopher Franz Oppenheimer was that there are two essential ways by which men seek to make a living. The first of these means is the economic one, involving private production and free exchange based upon voluntary association on an unhampered market. The second is the use of political means which is, at root, nothing more than a protection racket, an extortion of property with menaces, whether the shakedown is undertaken by the leader of some local banditti (‘We don’t need no stinkin’ badges!’) or by the Right Honourable Members of that Neo-Gothic fantasyland upon the Thames.

To this we could perhaps add a third means, one which straddles the two, for, as the Medici long ago recognised, banking entails a system whereby ‘the money gets the power and the power protects the money.’ Or, as the Swiss constitution puts it: ‘the law of private property does not apply to the Swiss National Bank’ – an unusually explicit recognition of the privilege extended by grant of a positivist state to its favoured institutions in infringement of natural law.

What shall it profit a Man?

Foremost among these are the sanction of fractional reserve banking (about which much more below); the introduction of and compulsion to accept fiat money; and, undergirding the whole by binding the monied interest to the state – as the founders of the Bank of England were proud to affirm – the incorporation of that engine of inflation and that paymaster of executive absolutism, the central bank.

This form of banking is very effective at fostering, fortifying, and fossilizing a self-perpetuating plutocracy whose venality is thereby left unchecked and whose vested interest comes to dominate policy making. It is, moreover, a marvellous way of inducing elected politicians – who, as a class, are not usually well-versed in such matters and who are, in any case, incentivized to suppress any misgivings they may feel – to believe they are able to ignore the hard constraints of economic inevitability. This highly dubious presumption is one for which they generally seek to enlist electoral support by trumping Marie Antoinette in declaring: “Let them eat cake and have it, too!” All that such men aim at is that the bill does not finally fall due until they personally relinquish the reins of power to their successors. Thus is both their cynicism and their Saint-Simonism bankrolled, to the detriment of all.

The bankers, too, are apt to delude themselves that mere economics can be circumvented if sufficient twisted ingenuity can be applied by their batteries of idiot-savants in cooking up a new batch of so-called ‘innovations’. These are usually dressed up in complex sounding names or clouded in a daunting alphabet soup of obscure acronyms, but represent little more than accounting tricks wrapped up with inappropriate gambling strategies. These consist of the hoary old devices of anticipating and then capitalizing future revenues; palming off the devalued coin; cheque-kiting; playing fast-and-loose with both capital requirements and capital structure; hiding exposures off balance sheet through wholly legal chicanery; and otherwise obfuscating the risks being run through the employment of, e.g., securitisation, ‘special-purpose’ vehicles, and derivatives.

Innovations, when undertaken by a real business are aimed at improving the range of realisable material possibilities by discovering how to do more, or better, with less. In finance, however, the usual game is to try to extend the range of claims upon such possibilities by finagling a way to buy more, or better, with less money down and extended payment terms thereafter.

As that giant of Victorian High Finance, Samuel Loyd, Lord Overstone, put it:

The ordinary advantages to the community arising from competition are that it tends to excite the ingenuity and exertion of the producers, and thus to secure to the public the best supply, due regard being had to the quality and quantity of the commodity, at the lowest price, while all the evils arising from errors or miscalculations on the part of the producers will fall on themselves and not on the public. With respect to a paper currency, however, the interest of the public is of a very different kind; a steady and equable regulation of its amount by fixed law is the end to be sought and the evil consequence of any error or miscalculation upon this point falls in a much greater proportion upon the public than upon the issuers.”

The consequences of ignoring this injunction should be all too apparent. Indeed, this is a methodology which the Bank of England’s own Director of Financial Stability (titter ye not at the ‘Io, Saturnalia!’ implications of his title) pithily dubbed ‘Risk Illusion’ in a recent speech.

  • Firstly, it generates the immense waste of the business cycle itself.
  • Secondly, it imposes a chronic inflationism upon society – an insidious pestilence which intersperses treacherously quiet periods of relative dormancy (viz., the risibly-named ‘Great Moderation’) with feverish eruptions of mass self-aggravation. This corrodes morality, self-reliance, and the viability of voluntarism as much as it renders all economic calculation suspect.
  • Thirdly, it dragoons us all into the role of speculator – regardless of aptitude or circumstance – as we try to preserve our spared value across time in order to provide for our dotage, or to bequeath a little seed capital to our children.
  • Fourthly, the insidious Cantillon effect of favouring those who get the new money first sucks far, far too many resources into finance itself, turning it from a conduit of savings and a facilitator of investment into a canker of self-engorgement and a furtherer of intemperance.


Figure 1: Banking v Business – Undue Enrichment

Finally, since few can protect themselves adequately from its ravages, such a system immeasurably increases the value of state patronage and so expands the reach of collective politics and shrinks the realm of private, economic action to a mere vestige of what it should be in a flourishing republic of law.

In sum, our dire financial-political symbiosis – what John Brewer memorably rendered as the ‘fiscal-military state’ – leads to the apotheosis of the Financier Class, the Expropriation of the Middle Class and the demoralization of the Working Class, a sorry pass we might justifiably term, Soft Fascism.

The Midgard Serpent

Once in the coils of this world-girdling Jörmungandr, we swiftly find that they form a vicious circle which slowly constricts our liberties and occasionally chokes out our very lives.

Banks emerge from the last crisis temporarily chastened and perhaps even subject to a tighter regulatory leash. But, before long, they have forgotten their former humble state and are embarking upon another wave of ‘innovation’ as their in-house sorcerer’s apprentices learn to game the new regime and once more prise open the Pandora’s Box of bad money and easy credit.

These are, after all, in their current manifestation, institutions riven with agency problems. They lack a due proportionality of aims between insiders and outsiders, or between short-term and long. They are unrestrained by the availability of that virtual ‘capital’ which only an institution with largely immaterial values on both sides of its balance sheet can deploy. They are ever-prone to a total abnegation of fiduciary duty – and yet they are the favoured children of a state which loves nothing better than the meretricious euphoria of the Boom, a period when politicians, too, can persuade themselves they have become true, bull market geniuses.

Come the inevitable dispelling of this illusion and the Bust is soon torn by the mutual recriminations, now that the thieves have fallen out. Boasts of ‘market fundamentalism’ give way to sneers of ‘market failure’– though the role of anything genuinely purporting to be a ‘market’ in all this remains elusive.

Those who would debauch us from the Right now cede place to those who would despoil us from the Left in a vicious circle which causes what we might call a dialectical dematerialisation of wealth and freedom, two precious pearls which are ground to dull, grey powder between the millstones of their antagonistic, but equally determined enemies.

Making the cycle worse is the fact that it has its own epicycle of Fatal Conceit intermeshed with it, for the modern central bank is not just there ‘for the continuation of the war’ – i.e. to obviate the need for the executive to persuade those who would otherwise furnish it with its ‘sinews’ to comply with its demands – nor is it merely the ultimate back-stop for the bankers’ cabal – ‘the lender of last resort’ – it is nowadays its own little Gosplan, charged with steering that grand, aggregate, quasi-hydraulic, abstract problem of engineering we are wrongly indoctrinated to think of as the duly-capitalized ‘Economy’.

Pushing and pulling on the levers of liquidity; arbitrarily moving interest rates up and down rather than letting capital-in-being and expressions of composite time preference lead them to their own level; tinkering with foreign exchange rates and even asset prices at large, the central bank aspires to a monopoly of knowledge it cannot, in fact, possess and, in serving too many masters at once, it compounds its errors of economic ignorance by dropping all other objectives in order to become a fire-fighter whenever the contradictions between them break out into open unrest.


Figure 2: ‘Tying the People faster to the Government’

Hence, moral hazard is entrenched and extended, crisis by crisis, as our earlier authority, Lord Overstone, was well aware it would when he railed, over 150 years ago, that:

The vicious system of Credit and Banking which is the source of the evil will derive additional strength from the assurance that, in all future emergencies, the Law will be relaxed for their assistance and protection… this leads me to anticipate future convulsions, increasing in magnitude, and more formidable in their consequences…”

Where all this ends up is perhaps best characterised as a Vacuous Circle – one built on nothing more tangible than the Cheshire Cat’s smile: a reverse transubstantiation where the more you look, the less you see.

In this, the state realizes it cannot do without its stricken banks (no matter what temptations accrue in the meanwhile to succumb to a populist condemnation of their undoubted enormities). Thus, it injects what it calls ‘capital’ into them and begins a ‘counter-cyclical’ expansion along the lines of that advocated by Bloomsbury’s most hallowed underconsumptionist crank in order to maintain ‘aggregate demand’ – whatever that might be.


Figure 3: Who’s saving whom?

Since this means it is soon spending even more above its income than is its norm, it also provides our central bank commissars – through their direct or indirect purchases of the resulting security issuance – with a way to inject more money into a system to make up for the quasi-nationalized banking sector’s temporarily inability to do so. As it expands its balance sheet – and takes on a riskier range of assets so as to accomplish this – the CB seeks an explicit guarantee from the Treasury that any losses which thereby accrue will be made good and so ensures that its own, vanishingly thin layer of ‘equity’ will not be compromised.

However, the longer the malaise persists – and an Austrian would have to insist that the reinflationary shock treatment and associated meddling is more likely to hinder, rather than to help, the self-healing process of entrepreneurial adjustment and individual self-repair – more and more will the awareness spread of the unsustainability of the government’s own finances, shifting the locus of the crisis to the sovereign fisc. Faced with a strike on the part of many of the former buyers of its paper, the state will insist that the banks mutate from the saved to the saviours by taking up that paper of their masters which its former buyers will not now accept – before refinancing it on highly favourable terms with the increasingly overstretched central bank.

So each drowning man avows that he will hold up all the others, though, the truth is that not only do all risk foundering, but that this noyade will drag under many whose only sin is to be unfortunate enough to live within the main actors’ jurisdiction.

Glasshouse or Glass-Steagall?

So, what is the solution? So far the suggestions – where actually made in some approximation of good faith – have focused on what we might call a narrowly institutional approach. This has certain merits – if only because nothing could be worse than leaving things as they are – but it will probably only provide an arena for future exercises of ‘innovation’. Like the hydra, we can expect two heads to grow for everyone that is severed unless we cauterize each wound as we go and for this we require the flaming brand of monetary reform, not the flickering taper of financial regulation.

One suggestion is that the banks undergo a rigorous separation of function, reversing a trend towards ‘universal’ banking which, far from adducing to stability, has patently encouraged even the most sleepy and conservative of financial firms to ‘tunnel’ profits from one department to another and to treat customer funds merely as the table stakes which senior employees and executives hope to parlay into the huge bonuses they intend to carve out of their winnings in the Global Casino.

Among their diverse roles, bankers (let us not here say, ‘banks’) may act as brokers of loans, foreign exchange or securities, earning a fee for bringing the two sides of a transaction together; they may lend their own capital to underpin the extension and acceptance of trade or other commercial finance; they may underwrite and even participate in the raising of capital for other firms; they may offer financial and investment counselling; and they may even take up the honourable enough role of speculators – provided this is not undertaken in connexion with a limitless ability to create credit from nothing and hence they should not be afforded the power to ignite a destabilizing, leveraged firestorm of conjoint asset-collateral appreciation.

Individually, all of these fields offer the scope for genuine entrepreneurialism: mixed together they are a bordello of the temptation to peculation and a cesspool filled with conflict of interest. Singly or separately, they should take place without either explicit or implicit government support or subsidy and should be subject to no less rigorous an application of the law than is any other business. It may even be asked whether the positivist legal privilege of limited liability should be withheld from those charged with managing other people’s wealth. Though it seems anachronistic to say so, even this was once seen as a dangerous ‘innovation’ which bought increased activity at the cost of a drastic reduction in personal responsibility, no where moreso than in finance.

If men wish to become bankers for the rewards they foresee, surely they can not object to being obliged to form a partnership to that end – a constraint which would bring the added benefit of preventing that overconcentration of risks which results in the deplorable spectacle of the worst malefactors being deemed ‘too big to fail’ and propped up at their victims’ expense.

For all the merits of such ideas, the issue of paramount importance is that bankers should be proscribed from undertaking any of the above activities in a manner which can itself give rise to the creation of money, per se. Once that particular genie is out of the bottle, all other hopes of a purer, safer finance are a phantasm or will-o-the-wisp: corked firmly inside it, however, and we may finally lay the ghosts of Chang Yung, Law, Thornton, and Keynes.

Physician, Heal thyself!

Now we come to the vexed issue of whether or not a Libertarian can consistently demand that the State whose interference he so abhors should be enjoined to enact the reforms he feels are necessary in this – or, indeed, in any other sphere. In this particular context, the question often finds expression in the rather querulous enquiry: “Why do you Austrians suddenly become so étatiste when it comes to banking?”

Firstly, we must insist upon our earlier proposition that banking – as presently constituted – is an insidious practice which straddles Franz Oppenheimer’s great divide between those who make their living through economic means (i.e., through private production and free exchange) and those who extort one, stealing others’ bread through political means.

Thus to enlist the machinery of the state to deny banking its access to political enrichment – leaving only its genuine market functions unfettered – is no more an act of tyranny than it would be to order the secret policemen to perform one last duty of throwing open the prison cells before handing in their uniforms and relinquishing their offices, once and for all.

Beyond even this objection, however, there comes the claim that, so long as a reformed banking takes place upon a ‘free’ basis – i.e., absent any government support, whether explicit or implicit – then it is nobody’s concern whether or not the individual bank decides to operate upon a fractional reserve (or ‘fiduciary media’) basis.

To our counter that there can be no justification for allowing an organisation to exist which is grounded in the non-Aristotelian nonsense that both A and not-A can simultaneously lay claim to the same property title, our free-fractional antagonists respond, in turn, that no voluntary arrangement – however delusional its basis – should ever be explicitly banned.

That may be all well and good for so long as the madmen confine themselves to their private, mutually-chosen bedlam. But, if one of them insists that when I buy from him – or, indeed, from one with whom he has previously dealt – a mutton, he is at liberty to deliver me something with two legs and feathers that clucks and lays eggs, the insanity he perpetrates can now have no place in any valid form of contract.

And – no! – for all the many attempts at establishing the analogy, fractional reserve banking (FRB) is NOT akin either to owning a stake in a time-share apartment or to paying for membership of a gym where the number of subscribers is demonstrably greater than the count of the machines.

Notice that the very description of the first clearly delineates a shared (i.e. partial) – and hence non-overlapping – claim to ownership, while the latter represents what is not even a call option upon fitness equipment services, but rather the purchase of a repeated entry to a lottery (albeit one in which the chances of winning are unusually elevated as these things go!) whose prize is their momentary usufruct.

Moreover, this misses the point that FRB precisely does allow multiple owners to exchange their sham claims for real property in the wider world, so a better parallel would be the improbable case where you can persuade your grocer to let you pay at the checkout by offering him to give him your gym membership card in settlement.

Once the gym owner realises that this is happening, he will abandon his former estimate of how many such memberships he can sell – a calculation once based upon the size of his establishment and the likely avidity for physical exertion he gauged his clientele would display – and instead he will start issuing more and more of the cards, secure in the knowledge that their owners now consider most of these not as use goods – against which he will routinely have to deliver – but as exchange goods whose hidden toll the wider community will be duped into bearing as he progressively expands their number and hence dilutes their content.

At its most basic, FRB pretends to offer a plurality of persons simultaneously exercisable rights to demand delivery of a present economic good, a veritable delusion; a rub-a-dub-dub, three-men-in-a-tub proposition with which only a quantum physicist could possibly be comfortable.

The Spark in the Powder-room

But let us move beyond what some may see as mere casuistry and consider a more fundamental objection, namely that for the true libertarian, liberty is a negative construct: that one can give rein to any form of behaviour one chooses – no matter how reprehensible some third-party moralist, or how manifestly self-damaging some frustrated paternalist may deem it – as long as the enjoyment of that liberty occasions no infringement upon the freedoms, or harm to the property rights, of others

Here, is where we would make our case against FRB most strongly, for it is not merely a question of the issuers of fractional monies stamping clear health warnings about their irredeemability-in-extremis upon the bank-notes, cheque-books, and cash cards which they give out and leaving the rest to an appeal to the spirit of caveat emptor – FRB is much more pernicious than that and much more harmful to the commonwealth at large.

After all, a man may well walk a highwire strung between two skyscrapers to which he has legal access – and he may even step out into the void, trusting to the imaginary support of a fractional reserve tightrope, if he so wishes – but what he may not do is jeopardise the lives of the innocents going about their lawful business hundreds of feet below him, wholly oblivious to the human sword of Damocles which teeters precariously above them.

Wherein, then, does this harm lie? Well, in the very consequences of all inflationism, of course – in the engendering of cycles of mass entrepreneurial error; in the inequitable enjoyment of a seigniorage rent by the issuers of money claims, destined to become overmighty in the economy as a result of this sweat-free exaction; in the promotion of disruptive fluctuations in the prices of goods and titles thereto by making them subject to a destabilizing speculation on the part of a hypertrophic financial sector which acts on the principle that where credit begets price rises, price rises beget collateral value, and collateral value again begets credit.

A bank may, of course, freely engage in credit broking and negotiation – bringing together borrowers and lenders (who enjoy no subsequent recourse to the bank itself) together for a fee; or earning a ‘net interest margin’ by interposing its own, saved capital between the two parties as additional security for the creditor.

What it must NOT, however, be allowed to do is to grant a credit ab ovo from nothing more than an entry on its books, trusting that an offsetting liability will later reappear as its loan customer’s payee seeks a home – however temporarily – for the proceeds, whether these are directly placed over the originating bank’s own counter or whether it borrows the relevant deposit from some other bank where the receipt has been parked, at least not where any liability in this chain takes the form of an unbacked demand – or fiduciary money – deposit.

We say this because such a mechanism, once permitted to operate, can and will be repeated many times over, distorting monetary valuations and eroding the whole superstructure of sequential exchange – and hence inflicting harm upon non-participating individuals. As Chuck Prince, the disgraced ex-CEO of Citibank famously and hubristically put it, in the summer of 2007, just before the iceberg tore open the bows of the entire ill-fated White Star fleet: ““When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Or, as the ever-sage Overstone argued in 1837:-

A Banker cannot contract his accommodation at a period when the whole trading and mercantile world are acting under one common impetus of expansion. If, under these circumstances, the Banker, in addition to what may properly be called his ordinary and legitimate resources, is also entrusted with the power of issuing paper-money ad libitum, is it not inevitable that he should abuse that power? Can we expect that… while all his other resources are strained to the utmost… he will keep a firm and unyielding restraint over the amount of his issues? Will he, under such temptations, in no respect compromise his…duties…?”

The harm comes about because each practicing FRB bank becomes instantly and irrevocably illiquid – a parlous status no other businessmen may wilfully entertain while in operation – while it also aggravates the hazard of becoming insolvent since any consequent monetary tremor will be multiplied throughout the shaky pyramid of a credit become too far extended; too far removed from the possibility of service – much less redemption – by its intemperate distribution; and too blithely treated as a viable money substitute by a majority dulled into incaution by the easy prosperity of the resulting inflationary Boom, yet disastrously prone to spurn it in favour of real money once the spectre of the Bust intrudes.

This Little Piggy went to Market

There are those who see this as ‘only’ a question of narrow financial prudence, going on to argue (in a rather credulous fashion, in the eyes of this particular, jaundiced, financial market veteran), that the removal of state support for the banks will be sufficient to bring behaviour back within acceptable bounds of risk, logical impossibilities and endemic insolvency, notwithstanding.

What this approach still neglects, however, is the pernicious effect of even the most actuarially-conservative generation of money de novo by banks on the very basis for entrepreneurial calculation and business planning.

Whether you see money as merely representational – as a warehouse receipt for some more material consignment of value – or as a good providing services in its own right, either it (or that which underlies it) must be, like all other economic goods, subject to scarcity and hence subject to hard choices about which other subjectively valued good will and will not be foregone in order to acquire or to hold on to it.

Once this qualification is removed – a deletion which FRB fatally achieves – we not only compromise money’s role as a medium of exchange in the here and now, but we scramble its ability to help distinguish between present and prospective outcomes, i.e., we disrupt intertemporal signalling, too.

In a distributed, divided-labour, delocalized, highly discretionary economic network such as ours, money must act as a reliable transmitter of information, not just as a porter of goods: it is not just a bloodstream, but also a neurotransmitter and while any disturbance to the former is cause enough for concern, any degradation of the latter function is likely to prove critical for the whole body politic.

No matter how restricted the practice might become once the state does not actively endorse or underwrite it, it is hard to acquiesce in a process which effectively counterfeits not just currency, but economic data – falsifying cargo manifests and forging bills of lading; faking stock taking and fiddling work rosters; miring the whole Spontaneous Order of the free market in a Great Salad Oil Swindle of fictitious accounting.


Figure 4: Six Crusoe Island – every man for himself

We can start to visualize this by considering what happens when we move from subsistence agriculture to a specialized system of production for exchange, as shown here. Once a number of merchants meet at a fair or country market, the hoary old ‘coincidence of wants’ argument leads us to suspect the rapid selection of a money will quickly follow, the better to circulate goods between them all.


Figure 5: The first market

Now C finds B has already sold to borrower E, leaving him chasing an alternative outlet of a lower, less satisfying ordinal ranking for his money, and so he ends by driving up the price of, say, corn. This accrues to B’s immediate disadvantage since his real return on the labour which he devoted to producing and marketing his eggs cannot but decline.



Figure 6: Money makes the World go round

Were bank money only hard – i.e., 100% backed by money proper, F could only have borrowed to buy B’s eggs if some other member of the group could have been persuaded to forego his own purchase in favour of saving that money, placing it in the bank, and seeing it lent on to F. No-one could have been cheated of his due, or seen his standard of living forcibly lessened in order to promote another’s higher, FR bank-enabled gratification.

Had that saver been C himself, little noticeable change would have occurred at all. But even the unquestioned and possibly discomfiting adjustments to be undertaken if anyone else had suddenly deferred his wonted consumption would at least have had the merit of being the result of a genuine change in consumer preferences. These would have been flagged through their effect on relative prices. C would soon have become aware that he had henceforth to consider either producing less of what he did before or else finding a remunerative way to lower his selling prices. The change in ‘data’ would also have sent out a message that surplus goods in some form now existed and that these could be used as capital, were anyone to be struck with a bright enough idea as to how to put them to a different — and hopefully more productive – use in the future.

Saving – the Source of All Spending

Patently, we do not live in such a simple E-Bay world of selling and buying horizontally, across the same (lower) order of end-consumer goods. Rather, the majority of us earn a living – and contribute to a vastly more productive array as we do – by helping give rise to higher-order goods – parts, precursors, tools, tramways, machines, machine-makers, forges, fireclays, smelters, semi-submersible drill rigs, and so forth.

In order to get to this particular state, goods spared immediate, exhaustive, end-consumption were once required, both to be redeployed as specific constituents of the new businesses’ equipage and in order to feed and clothe the personnel involved in their construction while they waited for the saleable goods to which they will give inception to be completed and stacked on the supermarket shelves in their turn.

The powerful consonance here, as we shall see, is that it takes net new saving to build the chain, ab initio, but then gross saving of the same magnitude in order to maintain it. Therein lies the danger of FRB and a prime reason why it should never be countenanced, as we shall further try to explain.



Figure 7: The structure lengthens – divida imperaque

As a first step, imagine that, instead of each making end goods directly, E and F come to realise that if they specialize, the products of their labours will be fructified – that they will either make more with less, or take less time doing the same, or both. What they discover next is that while E is rearranging his affairs, he will not be contributing to the end product for the one ‘cycle’ for which this retooling lasts. Thus he and F must already have saved one unit of end product before they can begin.

Once set up, this vertically integrated arrangement, this proto-productive structure, sees F have receipts of 2 units, one of which he extracts for his own income and spends (essentially on his own output), the other of which he remits to E in settlement of the intermediate goods he earlier delivered. E, in turn, spends that 1 unit on the remainder of F’s output of consumer goods.

Since the act of foregoing consumption today in the hope of enjoying a like or greater sum of consumption later is how we define SAVING in the first place, it is not too far a semantic stretch to insist that the ends to which F has committed half of his revenues have taken the form of saving even if to engage in such a productive outlay (an investment) seems very different to Grandma putting her widow’s mite into her post office account, for a rainy day. If you doubt this, just picture the distinction between the case when the CEO buys a new machine and hires ten new workers to service it – in the hope of boosting profitable output in the not-too-distant future – and that when our Boardroom Bravo simply votes himself a bigger pay rise and lays in a few crates of Chateau Margaux and a Picasso cartoon with the proceeds.

That granted, let us now suppose D is persuaded to join the chain, making an even higher-order good for E to transform, now into two, not one, unit of input to F’s factory, enabling him to churn out three, rather than two, units of final consumer goods. Now, F’s revenues expand to 3 units, but his cost of sales (all labour being supposed to be his own, and hence all net income, his profit) reach 2 (his gross saving), while E now spends 1 unit on end goods (to keep body and soul together) and devotes one unit of further saving to paying D his dues, so that D too may eat of F’s harvest.


Figure 8: Repeat as necessary

Already the economy has been transformed into one wherein the 3 original units of final output – of GDP, if you must – have been replicated, but now to the accompaniment of three additional units of gross saving where at first there were none. If we further trace back the process by which D moved from subsistence to his role high up in the structure, we can see that this involved him in waiting for two cycles to pass until his output found its final embodiment on the shop floor. Thus it takes two net units of saving (in addition to the one already laid out on E) and that this formative net saving henceforth becomes entrained as part of the expanded total of three units of gross saving continually involved in each repetition of the process. Again, we have three units of GDP-type end spending, but also three units of saving which go wholly unrecorded by the mainstream macromancers.

It should be obvious that each further lengthening (each ‘vertical’ increase) in the structure requires proportionately more saving and hence we are led to assume an ever increasing fraction of overall economic activity which will be completely neglected by a Keynesian-Kuznetzian mainstream which will thereby be left tangled in its non existent paradoxes and self-contradictions. Indeed, by the time all our six original actors have rearranged themselves into a chain of sequential buying and selling, we will have six GDP units but no less than 15 units of gross saving at issue.


Figure 9: Hayek meets Henry Ford

This may seem odd to those brainwashed to believe the mantra that ‘consumption is 70% of GDP’ but only because GDP is largely defined to capture end consumption in the first place! Hence the truism is a little like that saying that since 50% of the clothing I put on my feet are socks, the state of rest of my attire has no bearing on how warmly I need to dress when I go for a stroll! In fact, a careful reckoning of the US economy shows that there is a ratio between exhaustive, end expenditures and all business outlays of around 1 to 3.2, whereas our toy economy here gives a ratio of 6 to 21 or ~1 to 3.5


Figure 10: The Saving Grace of Specialization

Indeed, by plugging in the actual official statistics from the US which pertain to wages (including the forced levy on all – the tax – which employs the legions of the State), entrepreneurial income, sales margins, the proportion of revenues spent on buying-in goods and services (what we tend to call ‘Chain’ outlays), and that paid to one’s own workers – and after adding a few simplifying assumptions – we can pretty much mimic the broad structure of that entire economy with just such a simple, six-stage model as has already been outlined.


Figure 11: A Toy version of the US Economy

[As an aside, even the sums laid out by the last, lowest order entrepreneur on his own workforce is money he could have spent on end-consumption not, as here, for a productive purpose. Strictly speaking, it, too, can therefore be considered an act of ‘saving’, driving this proportion even higher in the overall mix and further giving the lie to the Keynesian bedazzlement with end-spending and its abhorrence of thrift.]


Figure 12: The Actual US Economy

Though we have not shown it here, the inference must be that we undertake all the toil and self-denial needed to institute this capital-intensive procedure, this savings-fertilized method of cultivation because we are aware that it leads to both a greater fecundity and a greater rapidity in the productive process.

What may be less evident from this schematic view is that, in order to provide higher order producers with the necessary capital means – without introducing dangerous disharmonies to the entire ensemble by simply creating a fictive version of them in the banking hall – we must trust in the emergence of a positive feedback between a greater division of labour, higher technological efficiency, greater material plenty, more readily available savings, lower yields on a more abundant capital provision and – yes! – gently falling prices.

Every Man for Himself

If you have borne with us so far in this somewhat protracted preamble, we may finally return to our theme in hand: viz., why FRB is so harmful and hence why there can be no place for it in the Free Society of our dreams.

Let us suppose that when we tried to introduce D to our nascent productive chain above, there were actually no real savings to hand. No-one had sufficiently foregone consumption: no-one had built up a large enough sum of loanable funds as their counterpart. As a result of this dearth, D’s attempt to utilize those funds would have immediately and correctly pushed up the yield payable on them, to the point where his undertaking would have been entirely discouraged.

Reinforcing this, relative prices – here the ones between those of the present goods which D needs as inputs (but which no-one else has relinquished) and the break-even prices of the future goods into which he hopes to turn them (and which must incorporate the higher interest his lender will charge) – will closely reflect the balance of consumer time preferences and the availability of the scarce, physical entities to be apportioned between them.

But, suppose a fractional reserve bank (state-fostered or free) had stepped into the breach, offering a simulacrum of those funds to D who – as a would-be entrepreneur, not an expert on Austrian monetary economics – could hardly be expected to appreciate the degree of extra risk this entailed, both to his own project and to the well-being of others, when he took this bogus ‘money’ and sought to wrest goods away from those not otherwise willing to surrender them from the purposes to which they had habitually been put.

Arriving early with his unbacked deposit claim in hand, D might initially inveigle their vendor to sell to him, but only by forcing others to go short of what they were accustomed to acquiring with their own, real money. D’s increased command over the available pool of resources could only come, therefore, at the expense of someone else’s real income, thanks to the fraud of FRB.

Without looking any more deeply into the likely consequences of this depredation, the very fact that we have here entered into a zero-sum game of pre-emption and deception, even as we are supposedly seeking to extend the scope of a harmonious, coherent, interaction of mutual betterment, should lead us to doubt whether such underhand means can ever be truly compatible with their avowedly benign ends.

What will happen, in essence, is that – this first time, at least – the late arrivals to the shopping centre will find that the shelves are less well stacked than before and that they must perforce make do with less, even if they offer the same sum of money as would previously have filled their baskets.

What Mises termed ‘forced saving’ has made its malign appearance. This is a phenomenon which, left to run without further injections of bogus money (and absent a near-miraculous, post hoc acceptance of the changed structure which D and his FR Bankers are trying to dictate to their fellows), will soon give rise to reversionary shifts (Hayek’s ‘Ricardo effect’) and a negative yield-curve struggle for liquidity (his ‘Investment that raises the Demand for Capital’) as producers and consumers come, not to co-operate, but to strive among one another like the warriors sprung from the dragon’s teeth in King Aeetes’ field.

But, as we have seen, whatever capital – whatever net new saving – it has taken to build a given productive structure, it takes an equal amount of ongoing gross saving to maintain it.

Thus, while many will acknowledge the Misesian futility of starting from scratch projects for which the necessary physical means are lacking, few recognise the corollary that FRB also perverts the process of ensuring the ongoing gross saving flow matches the resources needed to maintain an existing array, characterised by an extended capital structure, Herein lies another means for FRB to attack and undermine what we already have, much less foredoom a good deal of what we are starting anew.

Moreover, in today’s world the avidity with which banks seek to extend credit to consumers, not just to producers, only serves to sharpen these wholly avoidable conflicts by instigating an arms race of FR spending, one portion of which is trying to lengthen the productive structure beyond its sustainable extent and the other which strives to pull everything from the future into the present, conversely lowering capital intensity – and hence real wages – and simultaneously eradicating much of the ability to support the debts incurred as a result of this struggle.


Figure 13: Garrison’s ‘Austrian Macro’ before…

Here, too, we cross paths with the hoary old fallacy of the ‘real bills’ hypothesis. This untenable dogma was held by the so-called Banking School during the great monetary controversies of the early nineteenth century – and, in truth, is adhered to, in a broader interpretation, by central bankers today.


Figure 14: …and after intervention

At its simplest, what this says is that there can be no bad outcomes if banks restrict themselves to extending credit only on the security of documentary evidence of actual, short-dated commercial transactions, not least because these are said to be ‘self-liquidating’ and the loans are held only to ‘serve the needs of trade’.

But this only holds good if the banks are 100% reserve banks, since they otherwise entertain the power to monetize their loans – i.e., to turn into the most widely acceptable present good – evidence of the production and onward sale of a future good, i.e., of a present good yet-to-be.

Let us be clear here: we are not decrying the very necessary practice of a seller giving his customer time to pay for the wares. Business-to-business credit comprises no evil if left to itself. But, to transform this act of ‘waiting’ into a freshly-minted tranche of instant purchasing power, through the necromancy of A-and-Not-A FRB, is to turn a consensual line-up for orderly, sequential gratification into a disorderly mob of queue-jumpers and to make of every shopper a common looter.

In our well-ordered, toy economy, there is no cause for alarm if A sells to B on deferred payment terms and B to C, etc., all the way down to F who sells the resulting batch of consumer goods to his end customer base and remits the necessary monies back up the chain. In practice this theoretical self-liquidation is a trifle hard to unravel since a renewed credit chain will already be forming as the assembly lines roll on.

[To digress a moment, this reformation cannot simply be assumed away as mainstream economics tends to do as part of its crude, toilet-flush concept of end demand automatically calling forth a refilled cistern. If we can only break away from this Keynesian Cargo Cult, we should be able to see that each renewal constitutes a discrete, purposeful, entrepreneurial decision. It is here that we find the mechanism of ongoing adaptation and evolution that we call ‘growth’; here, too that the breakdown which goes by the name of ‘recession’ arises as the chains stretch and snap under credit-induced tensile loads too great for them to bear; and, finally, here where ham-fisted and ill-advised ‘stimulus’ packages become self-defeating by preventing the repair and re-routing of the connections necessary to put men and machines back to work and bring about ‘recovery’.]

To return to a theme, there is no difficulty to be endured if our man, A, decides he cannot wait to be paid and so persuades some third party (yes, perhaps through the intermediation of a bank) to buy B’s endorsed IOU for cash (with the inclusion of a little discount, by way of an incentive, naturally). Here, one man with a justifiable claim upon present goods (genuine money) voluntarily decides to save and so temporarily transfers his lien over them to A in exchange for B’s freely-given promise to pay.

Where this does fall apart, however, is when the FR Bank buys B’s note and credits A with an unbacked, fiduciary deposit balance. Now there has sprung into existence a claim on present goods which has not been renounced by a former holder – the bank has simply forged it – and, once again, this misdeed will provoke an undeclared struggle for resources which will disrupt relative pricing and arbitrarily re-direct spending. It will incite unforeseen migrations among the more mobile factors of production – each seeking their most remunerative new employment – and hence deprive the less mobile ones of the complementary goods necessary for the realization of their full, projected value. All of this tends to frustrate entrepreneurial calculation – most likely to A’s own ruination, since his position at the topmost, most specialized end of the chain makes him uniquely vulnerable to shifts taking place all along its lower reaches.

Thus, the application of unreal money to real bills banking theory delivers us unto the woes of the business cycle once again.

Gentlemen of the Jury

And if we were to accede to the demands of the advocates of Free Fractionalism, what compensation could we expect for allowing the serpent back into our little corner of paradise once he has dissociated himself from the support of the state? Why, we could congratulate ourselves at being beyond all aspersions of hypocrisy in our protestations of libertarianism. Less facetiously, we are told we could breathe more easily knowing that free FR banks could routinely expand and contract the money supply as demand for it waxed and waned (if you believe in the second possibility ever becoming arising, that is), thus maintaining the volume of the money flow through the economy in a fashion of which any Chicagoan or central banker would be proud.

To the contrary, we hope to have demonstrated by now that sufficient harm accrues from even a limited exercise of FRB that it constitutes a social evil to be tolerated neither by the enlightened despot nor under even the most minarchist of governing regimes, thus rebutting the first charge.

As for the second, this, too, is something of a macro-economic canard since such instabilities as this purports to minimise would in any case be unlikely to arise among a population habituated to the discipline of sound money and therefore with much less exposure to the double-edged sword of debt leverage and the insubstantial money which fosters them.

In navigating the far more robust, equity-girded productive channels which they will frequent in their dealings in a hard money world, it will be sufficient for the people to work under the instruction of committed entrepreneurs who are each intent on maximising their local success. Thus, the perceived need for macro-manipulation can safely be consigned to the dustbin of history along with theories of dephlogisticated air and tales of the bodily humours.

The entrepreneur will also become a man who runs a proper factory in a proper manner, rather than the shifty overseer of a tool-shop set up to disguise the atrium of a replica banking hall (as too many of his peers are today).

There will be less systemic frailty; fewer so-called ‘shocks’ as the lesser occurrence of incompatible plans will more rarely lead to a general grinding of the economic gears. There will be slow, productivity-induced price decay – a feature which, of itself, will tend to reinforce an anti-inflation mentality once people become attuned to it and recast their contractual arrangements in line with it. There will therefore be much less scope for inducing mass entrepreneurial error – perhaps none at all.

Thankfully, there will be no risk at all of that damaging monetary explosion known as a Boom: nor, conversely, of the general ruin which ensues amid the shattering collapse of a prior FRB inflation in what we know of as the Bust

In short, by extirpating this poisonous weed wherever it seeks to take root, we can ensure that we shall have no need to call upon the power of fractional reserve banking to protect us from the ill-consequences of fractional reserve banking itself!

The basic creed of liberty can be expressed in two Latin phrases – one other adopted by the London Stock Exchange as its motto in 1923, the other derived from Hippocrates. The former, “dictum meum pactum” – ‘My word is my bond’ – is both a declaration of personal honour and an affirmation of the sanctity of contract so essential to a largely impersonal, exchange-based economy. The latter, “primum non nocere” is Galen’s rendition of Hippocrates’ injunction, ‘First, do no harm’ and a useful rehearsal of the doctrine of negative liberty to which we adhere.

FRB intrinsically makes promises it cannot keep, so violating the first tenet, and routinely renders harm though garbling the signals generated by the actions, not just of those who indulge in it, but all of their fellows as well, thus transgressing repeatedly against the second. In short, FRB lies, cheats, and steals, and should be proscribed forthwith.

Thus, free bankers can only become useful, respectable, entrepreneurial members of society once the deadly opium of the fractional reserve is put irrevocably beyond their use. Denying them the capacity to wreak general havoc – however unwittingly they and their customers may do so – is, we contend, both a sine qua non of effective reform and a defence of, not an abrogation of natural rights at large.

Re-Peeling the Act

Back in 1788, the Blackburn textile manufacturing giant of Livesey, Hargreaves, Astie, Smith & Hall spectacularly failed – triggering, as it did, yet another commercial panic.

In many ways the Enron of Enlightenment England, the firm had come to neglect its former practice of seeking out and employing the most technically advanced production methods in its real business in favour of a fatal fascination with the fruits of financial engineering – ultimately in a wholly fraudulent fashion.

That same year, just down the road in Bury, a rival clan of calico printers briefly set aside all consideration of the tumult caused by the bust to celebrate the birth of a son to the head of the family. Half a century later, that same child may well have reflected upon the stories told him of the troubled time he came into the world when, as the capstone of a long and noteworthy political career, the by-then Sir Robert Peel passed a famous piece of legislation – the Bank Charter Act of 1844 – aimed at heading off the possibility of any such event ever recurring again.

Sadly, the rudimentary understanding of what constituted ‘money’ in a period of changing commercial and financial arrangements – a lack hardly less prevalent today, if truth be told – thoroughly vitiated a brave attempt to limit that unbridled bank expansion which had correctly been identified as the root cause of all the woes.

Ironically, the error lay in refusing to accept that the unbacked deposits which we have here argued are an avoidable evil could not be money, precisely because not all the claimants thereto could possibly be satisfied at once. Thus did the sheer illogical nature of fractional reserve banking defeat the keen, logical minds trying to limit the excesses spawned by it!

Now this is all very well and good, you say, but how are we actually to effect such a radical change in a modern economy? Surely, we are beyond the point of no return and it would prove far too complex to reconstruct three centuries of building work, in situ, however jerry-built and ramshackle the existing edifice may be?

Well, perhaps. But there are ways to turn the arguments of the Jacobins who rule over us back to bite them, in their turn. We, too, might resolve ‘not to waste a good crisis’, but to turn the unpopularity of bankers and the growing distaste with politics-as-usual to a solid, liberating effect.

To show how this could be done – at least in principal – let us set aside our doubts about whether such a thing could be put into practice and instead concentrate on how it might be done by means of a Gedanken experiment of monetary reform that owes much to Professor George Riesman of Pepperdine University, coupled with a neat fiscal manoeuvre based on the ideas of that somewhat contested eminence, Irving Fisher*, and adds a few castles-in-the-air from your author which outline a series of political changes to accompany them.

After all, as Sir Charles Wood, later Viscount Halifax, the then-Chairman of the Parliamentary Committee of Inquiry into Banking, put it, in 1840:

I anticipate from the adoption of this measure a less fluctuation in the amount of circulation – a less fluctuation in the range of price; but I am not so unreasonably sanguine as to suppose that it will put an end to all speculation and to all miscalculation in commercial matters. Prices will necessarily vary according to relative supply and demand for commodities at different times. Speculators will make mistakes in the calculations… prices may be unnaturally forced up and individuals may be ruined in the collapse.”

All this cannot be put an end to, so long as competition exists in trade and hope of gain influences the human mind; but it is no reason why we should not remedy what is in our power because we cannot attain everything. We can prevent an additional stimulus being given to a rise of prices and undue speculations by the influence of an ill-regulated currency; and this it is the duty of the legislature to attempt.”

So, to start, firstly let us imagine that the aggregate figures which the Bank of England provides for the sterling assets and liabilities of UK banks (MFI’s or ‘Monetary Financial Institutions’ in the jargon) actually refer to a homogenous collection of banks similar in all their essential details.


Figure 15: All for One & One for All

We find that (in round figures) these banks have around £2.7 trillion in assets, of which £320 billion represent claims on each other and, hence, a similar £320 billion of liabilities due to their peers. As well as some £2.0 trillion in other liabilities, they dispose of around £380 billion in equity capital, $60 billion of which represents the emergency infusion undertaken by the government at the height of the recent Panic.

More specifically, around £800 billion of those liabilities consist of demand deposits held by entities other than banks, while £100 billion of the assets are deposits and reserves held at the Bank of England and £70 billion represents loans to, or purchases of securities from, some level of government.

[* Since writing this piece, Professor Jesus Huerta de Soto of the Rey Juan Carlos University of Madrid has pointed out to the author that a broadly similar scheme of monetary reform was set out in his 1998 book Dinero, Crédito Bancario y Ciclos Económicos]


Figure 16: A Closer Look

To undertake a bit of necessary housekeeping first, let us arrange for a ‘tear up’ of that whole £320 billion of ‘pig on pork’, interbank entries, much in the manner that we do with credit derivative positions, through netting and novating via a clearing house. Perhaps, as its one last act of public service (!), this can take place under the auspices of the Bank of England which will also assume direct liability for the £100 billion in demand claims which the banks have already redeposited with it as part of the extraordinary precautions they have engaged in over the past two years as they have sought to shelter from each other’s poorly-concealed frailties.


Figure 17: The Bare Essentials

Next, we come to what we have argued is the crucial point – viz., the removal of all the unbacked, unpayable, fiduciary media, demand deposits from the banks’ books, thereby relieving them of the greatest single threat to their continued existence and cutting them off from the money creation business, once and for all.


Figure 18: The Communal Strongbox

In an ideal world, we would argue that this should best be done using precious metal, but even government certificates would provide an acceptable interim solution as long as we insist no more than the amount we will finish with at the end of this transformation is ever to be printed again or accepted in settlement of any account. In practice, we will probably not need to realize much of this sum in paper form at once, since we can register the balance in a centralized, digital money warehouse, or giro office, to which anyone in the country can have a convenient electronic or smart card access simply by applying with the relevant personal details and demonstrating initial proof of a claim to some (low) minimum sum.

But if the banks now have £800 billion fewer demand liabilities, but only £100 billion fewer assets (thanks to the transfer involving the BOE), we must do something to prevent the residual £700 billion becoming a windfall addition to their net worth. We achieve this by insisting they compensate for the deposits’ redemption by issuing shares of equal value to the government (in fact, they can pay for £70 billion of that by relinquishing the claims they already hold on the state, meaning they only need issue £630 bln in new equity).


Figure 19: Taking the ‘M’ out of MFI

This obviously represents a massive – though, as we shall see, a temporary – dilution of the existing shareholders, but they are hardly in a position to complain given that they only retain a holding at all, thanks to the concerted government/central bank intervention in their favour these past two years.

Moreover, we could simply tell them that the alternative is to keep their demand depos – absent any form of government guarantee and shorn of any possibility of accessing funds from the central bank – and that they will naturally be subject, under ordinary company law, to a rigorous marking-to-market of all their existing assets. Once suspects that very few would have the temerity to run the existential risk such an option would entail, but those that do would presumably be the fitter specimens and therefore fully justified in their non-compliance – so long that is, as they swap the necessary quantity of other assets for money proper and so acquire full, 100% backing for their retained demand deposits, without delay.

At this point, the asset side of the aggregate balance sheet has lost £70bln in claims on government, £320bln in interbank lending, and £100 vis-à-vis the BoE, leaving it with a notional £2,210bln in miscellaneous claims. Against this latter total it has £1,200bln in non-demand liabilities, £320bln in private equity capital and £690bln in government equity.

Suitably reinforced, we can now apply that rigorous cleaning of the Augean stables about which the banks and their masters have been prevaricating for far too long. Assets must be marked sternly and unsentimentally to market so as to restore trust in their valuations and hence to make possible a full resumption of business on the free market, in due course.

Assuming this to take the form of a haircut of some 15% across the board from QI 2010 book levels simply by way of example and not to imply any special authorial insight into the matter), we can apportion the resultant loss of £331bln equitably among all the stock holders, leaving a privately-owned net worth of £215bln and a public stake of £464bln (a loss of around a third each).


Figure 20: The Leviathan Trust

Now comes the next clever bit: the state re-privatises its portion (taking a pro rata lien over the total portfolio) in the form of either a cash payment with which it will redeem its outstanding debt or by way of a debt-for-equity swap. The private shareholders of the bank itself are, of course, at perfect liberty to try to buy out their ‘partners’ if they can raise the necessary funds on a market where these cannot, however, now be conjured out of thin air by the witchcraft of fractional reserve banking. Failing this, the separated entity can convert itself into a closed-end fund or be subsumed into the assets of, say, an acquisitive insurance company or pension fund.


Figure 21: The Fifth Labour of Heracles

The sound, sanitised, non-fractional, private, free banking company rump left behind in this second case will thus end up with £1,415bln in solidly-valued assets funded by £1,200bln in miscellaneous, non-demand (and, hence, non-monetary) liabilities and £215bln in equity capital. More to the point, the integrity of its accounts should now be beyond all reasonable dispute.

Given that we will have no further place for fractional reserve banking; given, too, that we are going to pass a binding, balanced budget resolution through parliament; and given that we are going to convert a considerable slice of government debt to non-interest bearing, perpetual certificates (bank notes and giro entries), we shall henceforth have no need of the Bank of England and can move straightaways to abolish the problem brainchild of that old seventeenth century buccaneer, William Patterson, putting an end to its three centuries history of mischief and malfeasance.

The Old Lady herself holds £207bln in government paper against £50bln in physical notes and coins, £57bln in deposits from foreign banks, that £100bln of the public demand deposits we earlier transferred off bank balance sheets. Once again, we will redeem these latter two against a credit in our giro office and we will simply let the state assume direct responsibility for the note and coin issue, thus allowing it to cancel another £207bln in outstanding, interest-bearing debt obligations.


Figure 22: The Discontinuation of the War

Overall, the government has been able to redeem £741bln of its current £880bln of net gilt and Treasury Bill issuance in this fashion, giving it a seigniorage gain of around £22bln a year in interest savings – equivalent to a rise in VAT of over 4%. Of course, that will still leave the Chancellor with an annual hole of around £110bln to fill before he can balance the budget, as we shall insist he must.


Figure 23: The Rewards of Virtue

Happily, this will leave him no choice but to take an axe – perhaps even a flamethrower – to the strangling underbrush of the Welfare-Warfare State and so allow space for the green shoots of peaceful private enterprise to spring up.

Here at the conclusion of our programme, the public has just as much money as it had before, except it holds this now in a non-fractional form. This is neither inflationary nor deflationary (for so long as we can adhere to our bargain to allow no more money ever to be created) and so the transition should inflict the least pain on the economy, though this is not to say that there may not follow some kind of stabilization crisis as those who have come to rely too heavily on a continued flow of unsaved credit begin to make some painful, but unavoidable readjustments to their affairs.


Figure 24: Safety Deposits

Though not strictly necessary, as a next stage, we might encourage the public to buy gold and silver with their holdings, against which money certificates could be issued and hence a genuine ‘coverage’ gradually increased which would provide a better guarantee against future political backsliding. Perhaps we could even impose a small transaction levy on financial dealings, partly hypothecated for the purpose of paying the running costs of the money giro, and partly for buying metal, with this latter allotment strictly scheduled to expire the minute that all monetary liabilities have been matched with a due weight of bullion and full-blooded specie.

Were we to give full rein to our irony, we might instead raise this sum as a ‘Tonnage of all Vessels… and certain additional duties of excise upon Beer, Ale and other liquors…’!

With a safe and stable money supply equivalent to more than 25% of total gross spending, there should be no foreseeable shortage of the means to effect final payment. Banks have been restored to health and have been given incentives to develop a truly entrepreneurial business model. The central bank has had the last rites read over it, bringing an end to Whig Corruption and War Socialism, both. The government has rid itself of five-sixths of its interest-bearing debt obligations, immediately helping stabilize its finances and ‘crowding’ private investment back in to the capital markets which are themselves now made properly functioning distributors of savings.

Secure in the knowledge that we have an unshrinkable core of money to which activity can readily adjust; comforted by the recognition that we have done our best to pop bubbles while they are still the merest flecks of foam; cognisant that we have greatly limited the pyramiding of one financial risk upon another; we can now embrace falling prices as the mark of our productive expertise, the sign of our material improvement and the reward of our self-discipline and providence.

Why should the Commonwealth not now flourish and the Republic of Law not stand firm?

Custodiemus ipsos Custodes

Back in 1856 – in the wake of yet another crisis – the report of the Select Committee on the Bank Acts contained the following, trenchant phrase:-

No system of currency can secure a commercial country against the consequences of its own imprudence.”

With that in mind, let us conclude this exercise by deviating from economics a little, for what these reforms need – variously, to fix them in place, to re-orient men’s thinking, and to remodel their institutions so that they can wrest the best advantage from the new landscape of sound money – are changes of a political dimension. In that light, we offer the following broad platform of proposals.

For starters, the paring back of that overgrown rent-extraction industry which is finance should not be viewed with remorse, but with relish at the prospect that all those hard-working, sharp-witted individuals who can no longer find a niche there might turn their hand to creating wealth rather than siphoning it off from others. In order to nurture such a shift, the state must not succumb to a dirigisme it, in any case, can probably no longer afford, but it must exercise foresight in removing all identifiable barriers to productive enterprise.

We want no Colberts, only Cobdens: no Five-Year Plans only freedom of association and contract.

In our newly non-inflationary world, this will thrive best within an equity culture, not a debt addiction, something which will necessitate a deep-seated alteration in the tax treatment of dividends and interest payments. Furthermore, this wholesome trend towards owning a business rather than leasing it from one’s banker should be encouraged by assisting the firm’s capacity for self-finance through a radical overhaul of the concept of depreciation allowances.

Additionally, all possible steps should be taken to assist new, competitive upstarts to challenge entrenched business dinosaurs. We want no artificial impediments to the selective pressures which will drive a constant process of improvement under a profit-seeking framework – nor do we want those profits to result from cosy deals between established corporate giants and the collusive state: we are pro-market, NOT pro-business, much less pro-Corporativismo.

A beginning might be made by enacting a drastic reduction in paperwork and regulation, together with a widespread disavowal of state interference in both labour and customer relations. All of these are burdens which tend to penalise those starting out in business, by dint of the disproportionate fraction of their meagre resources which they have to devote to satisfying their bureaucratic tormentors. A further advance would be the facilitation, not the frustration of, effective succession planning, so that we harness a man’s entrepreneurial drive to his laudable desire to provide for his family with the aim of rewarding longer-term thinking and sound business management.

Having thereby empowered the entrepreneurs who will drive this new economic wonder, we now need to ensure they have sufficient fuel in their engines. Since this capital means will henceforth take the form of genuine savings, not the pretence thereto issued by a fractional bank, such taxation as is necessary should be minimised in its impact on thrift and investment and shifted instead to weigh more on items of end consumption.

As we have mentioned above, the sundering of the unholy alliance between the Executive and the Banks will discourage too much government borrowing, but it would not hurt to underpin such parsimony by insisting upon a binding balanced-budget mandate. Restoring the power over the purse to elected representatives would be a first step on the road to devolving it all the way back to those whose money is actually being disposed of.

Stripped of its ability to offer benefits to those who will vote for it beyond anyone’s willingness to foot the bill directly, the sliding scale eradication of the vast, divisive and despotical Provider State should not just become an ideological ideal, but a financial imperative.

This would be further hastened if we were to recall both de Tocqueville’s perspicacious observation that a democracy can only last until the government realises it can bribe people with their own money and the less steadily-attributed inversion of Tytler’s that it will also fail when the people discover they can vote themselves money out of the public treasury. Here, we would propose that each person is given a fractional franchise, suffering a reduction in the weight of their vote which is graduated according to how much income they derive from the state.

Naturally, full time public employees (and employees of ostensibly private firms whose business is the fulfilment of government contracts) would be denuded of the camouflage that they, too, pay tax out of a notional gross wage, when all they really receive is the net that has been confiscated from the earnings of some put-upon private sector worker and, as a result, they would immediately be disenfranchised. Thus the taxpayer’s oft-truculent ‘servants’ would no longer be able to outweigh their currently hapless employer’s valuation of their services, or override his decision as to the strength of their overall establishment, just as those he hires privately are unable to do, either.

A surer link between value received and value given we cannot conceive of and if this means that public sector work seems less rewarding in future – or, as we suspect is much more likely, if demand for public ‘services’ is revealed as a great deal more limited once the illusion that it is ‘free at the point of delivery’ is replaced with an identifiable and personal price tag – so be it.

Beyond this, we would do all we can to rid us of the curse of the lifelong professional politician. We wish to slam the door shut in the face of the sort of fledgling Gauleiter who studies politics at university, then attaches himself to some previous generation, hack incumbent of his exact same ilk, perhaps as a researcher or – worse – a lobbyist, and then begins to wheedle his or her way up the greasy pole.

His/her apprenticeship of amoral expediency fully served, our worm next passes through that latter-day Rotten Borough, the ‘safe’ seat – to preclude which chicanery we would also insist upon full local command of the candidacy for all constituencies, backed up with a meaningful residency qualification to avoid cherry-picking by those political parachutists who drop in from Central Committee to garner the votes of those they are supposed to represent, but in whom and for whom they display neither interest nor affinity. Beyond that, and there beckons that table-scrap of patronage – the junior ministry.

Successful in attaching him/herself to the entourage of the most successful and ruthless of his party’s many venal jockeyers-for-power, our specimen ends by bagging one of the great offices of state – and then looks forward to a life of red-carpet book signings, soft sofa TV appearances, fat chequebook think-tank lectureships, lucrative company directorships, and the odd, deep slurp from the UN or EU gravy-train as a reward for what he/she claims, in his/her cant, to have been his/her long, austere years of pious self-sacrifice and disinterested public service.

Since we do not ever want decisions being made about our lives and livelihoods by men and women like this, with no experience of what it is to make an honest living in competition for a customer’s hard-earned sovereign, we would deny eligibility to Parliament to people who have not worked for at least ten years in the private sector (the authenticity of this to be judged by their average rating in our proposed fractional franchise over the period).

Since we also do not want people spending every minute of every day thinking up new rules and regulations and passing reams of intrusive new commands and prohibitions – whether to satisfy their own intellectual vanity or to promote their career prospects by seeming to be ‘effective’ – MPs should be paid no more than the most exiguous stipend by way of defraying a minimal level of expenses and they should be actively encouraged – not debarred from – simultaneously engaging in productive employment in order, severally, to make a living; to keep them well-grounded in the cares of the real world; and as a deterrent to ensure that no-one wants to loll around Westminster for too long, cooking up mischief .

That done, it would hardly be unpopular to drastically reduce the time the House sits. To convene infrequently to discuss the co-ordination of a necessary fix for something that has obviously become broken is one thing, but to be plotting and scheming, day and night, to remould Mortal Man in the planner’s image is quite another.

In fine, Parliament should only meet with the words of Cromwell pre-emptively ringing in its members’ ears: ‘You have sat too long for any good you have been doing lately – Depart, I say; and let us have done with you. In the name of God, go!’

This article grew out of a short presentation given to the Institute of Economic Affairs in London, 9th July 2010, at the kind invitation of those stalwarts of liberty who run the Cobden Centre.

Sean Corrigan

Oh Dear,

First Published as ‘Overegging the Pudding’, 30th September 2008

In his latest piece, Frank Shostak approvingly quoted Jeff Tucker’s earlier rhapsody as follows:-

But as wonderful as the daily shifts and movements are, what really inspires are the massive acts of creative destruction such as when old-line firms like Lehman and Merrill melt before our eyes, their good assets transferred to more competent hands…. This is the kind of shock and awe we should all celebrate. It is contrary to the wish of all the principal players and it accords with the will of society as a whole and the dictate of the market that waste not last and last. No matter how large, how entrenched, how exalted the institution, it is always vulnerable to being blown away by market forces — no more or less so than the lemonade stand down the street.

While I approve of the sentiments, I am forced to demur at their application.

More competent hands“? Do me a favour! More like hands privileged with more political clout, greater regulatory support and enshrouded in more opaque accounting regulations.

JPM has more risk on its books than any other (large) bank in America, both numerically and proportionately, yet it has somehow come thru’ with shining colours. Was this all due to the superlative entrepreneurial skill of its management? It hardly seems likely. Citi paid an enormous price to buy a hedge fund manager who promptly closed his old shop the minute the embarrassed departure of his ‘dancing queen’ predecessor left him in charge. BoA? Well, who knows whose mess it was they were actually covering up when they took on that nest of vipers which was Countywide?

Nor have Merrill’s assets been ‘transferred to more competent hands’ either – they have been bailed into a more friendly fold where the same senior managers who got them into the mess (and who were probably selling much of their exposure to their new co-managers over the past few years) will still reap fabulous remuneration as the guiding lights of the new bastard offspring.

The US Govt has effectively decided that its corporatist national champions in the coming forced consolidation will be JPM, Citi, BoA and now GS and Morgan Stanley – the latter pair newly transformed into banks where the teat of succour runs more profusely, and where the Fed/FDIC accounting regulations are less onerous than those of the SEC; where they can sit, jaws agape waiting, not to be explicitly bailed out from their funding difficulties, but to pick up cheap deposits from the authorities at the expense of an arbitrary denial of the contractual rights of debt and stock holders in those small fry firms who are seized the moment they totter.

I have to say this next piece of special pleading also made me involuntarily spit my Assam half way across the room:

‘Only a few weeks ago, we saw that the liquidation of a large bank such as Lehman Brothers and the sale of Merrill Lynch did not cause massive disruptions. In fact, the adjustment was swift and almost invisible. The reason for the smooth adjustment is that the market was allowed to do its job. If government and Fed bureaucrats had tried to intervene with bailouts, the whole process would have taken much longer and would have been very costly in terms of real resources.’

No ‘massive disruptions’?!? A ‘swift and almost invisible adjustment‘? The god of the market doing its work?

We had a $200 billion run on money funds; a plunge in many commodity prices; a jump in credit risk premiums to unprecedented levels; renewed stresses at regional banks; bail outs in all of the UK, Russia, Iceland, Denmark, Belgium, Germany and, effectively, Ireland; a near global criminalisation of short selling; wild and damaging gyrations in foreign exchange; what is feared will be the decimation of whole cohorts of hedge funds (many of whom have not only had their business model outlawed but had their assets frozen at Lehman, their prime broker); a further freeze of money and capital markets; the launch of government stock support schemes in Asia and, even before yesterday’s rout, what I think is now in excess of $1 trillion of global central bank injections to try – so far to no effect – to prevent the whole house of cards falling in one quick heap!

I confess that I don’t quite see where the ‘free market’ was at work in any of this. Moreover, I should well imagine that it might just prove ‘very costly in terms of real resources’, indeed, by the time its ramifications become clear. As Fritz Machlup once wrote: “the bust always starts as a monetary crisis and then becomes a real one“.

To call a spade a spade, Lehman was an ill-judged gamble at restoring a little macho credibility to a team which had swung drunkenly between paying handsomely for Bear to be folded into JPM, putting FNM/FRE into ‘conservatorship’ (whatever THAT actually means in practice), semi-rescuing AIG, summarily dumping Lehman (on the ludicrous grounds that, unlike the others, the market ‘could see it coming;!), brokering a Merrill wedding, elevating Goldman to unimpeachability, expropriating WaMu debtors, then taking over Wachovia as a fictional ‘open bank’.

All of this, too, despite a long litany of expressed false optimism and prevarication, not to mention the subtle diplomatic pressure aimed at inveigling America’s long-suffering foreign creditors into pouring more money into these sumps of moral corruption and managerial ineptitude. Failing a positive response from their would-be ‘marks’, the authorities themselves have meanwhile broken every rule and violated every custom in the urge to lend to them on ever easier terms, all without once demanding that they account consistently for what is on their books as a quid pro quo.

Therefore, to add to liquidity problems, deep suspicions about the asset side of the balance sheet, and worries about the future income stream, all this flip-flopping has now engendered an even more debilitating opaqueness about the regulatory treatment of the whole legal ranking of liabilities, to the extent that proper market solutions seem, sadly, ever more remote.

So while you might cheer all this, let’s not pretend that it has been serene and untroubled or else our ideological foes are going to be able to strike back to good effect by quoting such La-la land outpourings of joy when the bankers’ problems become those of a whole host of otherwise blameless enterprises and families, as they inevitably will.

In a ringing condemnation of Wall St welfare I am foursquare behind you: in singing false paeans to an impossibly Panglossian reading of events and in trying to gloss over the wrenching – if ultimately salutary – consequences of a collapse, I suggest you are being naively counterproductive.

Our enemies are on the run, so a little less hysteria and a deal more calm ratiocination and sober exegesis might prove far more profitable than all these ill-judged – and, frankly, jejune – bromides which are being loosed off willy-nilly by people who – judging from both the blog and the mail-list – are in many cases not in any way current with either the institutional framework, the policy implications, or the international repercussions of what is going on and who (perhaps understandably) reveal themselves to be totally unversed in the perverse functioning of modern financial markets, for all these commentators’ undoubted academic brilliance.

It seems that a sizeable faction of the Mises group has become so intoxicated at the chance of getting a date at last with the girl of its dreams, that it has dipped too deeply in the punchbowl of ‘I told you so’ and has ended up goosing her mother instead, in front of all the family. Come on guys, get real – and leave the empty hosannahs to the Collectivists!

I am sorry if this sounds abrasive, but I strongly feel that, in many instances, the rush to print is being mirrored by a rush of blood and I fear that immoderate language and the blind quotation of Misesian scripture during what is clearly one of THE great upheavals of our irretrievably flawed monetary and political system can only be to the detriment of the cause over the longer haul.

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Two-Minute Markets

Transcripts of a short daily bulletin recorded for World Radio Swiss in Geneva and broadcast during their early evening ‘Drivetime’ programme available on DAB and here

Thursday 17th November Slowly, slowly some element of what our American friends insisting on calling ’normalcy’ may be creeping back into the world – if only out of sheer fatigue at all the back-pedalling and scrambling to re-position that has taken place since the Trumpslide last week.

Major stock indices from Tokyo via Shanghai to Paris, London and onto New York headed into the latter part of the day essentially unchanged as a pause for breath was finally taken.

That said, there were still some rumblings in the bond and currency markets where yesterday’s corrective move failed in its early morning attempt to prolong itself, notwithstanding the BOJ’s first dry run at its slightly deranged policy of offering to buy all the bonds anyone might be willing to sell it at the lofty rate of zero percent – a particular lunacy clearly reflecting the wider derangement which saw no-one take the bank up on its offer!

As a result of this lack of follow-through, long Bunds underwent a 1 ½ point intraday reversal, while their US Treasury equivalents turned smartly about-face to knock, once again, on the doors of 3%.

Likewise, the euro – having come up, gasping for air, from its brief ducking below the surface of the 1.07 to the dollar mark –  was soon thrashing about once more in the seemingly forlorn hope that some passing Samaritan would throw it a lifebelt.

Proximate cause for all this was a burst of strongish US economic data, compounded by some faintly hawkish, if typically weasel-worded, pronouncements from F,ed Chair Janet Yelle.,

In dipping to 235 000, initial claims for unemployment benefit hit depths not surpassed since 1973 in outright terms and set a new all-time low in the near 50-year series when expressed as a percentage of the population.

Consumer prices, meanwhile, recorded a climb of 1.6% which was their fastest in a year, with the measure’s ongoing acceleration made evident in the successively more rapid annualized rates of 2.5% and 3.4% registered over the shorter intervals of six and three months, respectively.

With a smart rebound also reported from the previous month’s – possibly weather-affected – pace of housing starts also being reported that completed a perfect Trifecta, so it was just the right moment for Madame Yellen to hem and haw about the coming rate rise.

This, she less than convincingly declared, ‘could well’ become ‘appropriate’ IF – note the conditionals and subjunctives strewn liberally throughout her testimony – ‘the incoming data were to provide further evidence that the Fed was approaching its targets’

There, that told you, children!

Leaving rates too low for too long, we were warned, might necessitate a more abrupt tightening later, not to mention the danger of ‘risk-taking’ behaviour rearing its ugly head in the interim – something it has apparently not done up to now because policy is only ‘mildly accommodative’.

After all, with real Fed funds averaging 2.2% over the 20 years of Great Moderation leading up to the Crash, or 1.5% in the last decade before that same cataclysm – and of course, not ever themselves being so ‘accommodative’ that they led to the sort of ‘risk-taking’ which precipitated the collapse –  the fact that we have now had seven, unprecedented years of negative real rates, during which time they have average minus 1.2% could not POSSIBLY be thought of as being too loose, now could it?

Wednesday 16th November In the markets, people are often heard to speak of ‘Doctor Copper – the metal with a PhD in economics.’ Although coming from an era when one in three American jobs were to be found in manufacturing and not the lowly one in ten which is the case today – there is still a kernel of truth to the idea that any major expansion of physical output tends to involve the use of a greater quantity of copper.

This is the case in spades – or should we say, in Trumps – for the construction business, or for ‘infrastructure’, as the new buzz word would have it.

Thus it is that the good doctor seems to have been heavily self-medicating of late, allowing him to enjoy a rush of 20% in just four days and sending volume records tumbling around the globe as the sudden prospect of President Trump standing there in high-viz and hard hat, rebuilding the nation from sea to shining sea, has geed up the speculative classes in no uncertain fashion.

On the main New York futures exchange, known as Comex, just a few short weeks ago, sentiment was mildly negative – and overall positioning therefore short – as it had been for much of the past three years of subdued growth and generally declining commodity prices.

Then – bang! – first kick-started by the surge in Chinese appetite and then supercharged by the US election result, positions swung suddenly to the bullish side, with net longs achieving the largest 2-week increment ever seen, to take their total count to within a few percentage points of the all-time highs set right at the start of the so-called ‘commodity supercycle’, back in 2003

What’s more, those numbers were recorded on election night itself and so do not yet cover the subsequent frenzy unleashed by that earth-shattering event.

Remarkably, had you sold your US T-bonds a week before the election, and bought copper with the proceeds, you would now be ahead by almost 20% on the trade, despite the partial slippage suffered by the metal in the interim.

Over a three-week haul, you’d also be between 25 and 33% richer than those of your peers still clinging on to those darlings of the hour, Apple, Google, and Amazon.

If you ask the good folks at the shovel end of the copper business, they sound somewhat nonplussed at the move, with the senior executives in China whom Reuters recently interviewed convinced that supply would outstrip demand both next year and the one to follow.

So how to explain the move?

Perhaps the best we can do is draw upon the wisdom of Frederick Lewis Allen, one of the more perceptive social observers of the ‘20s and 30s, who once remarked, of the Great Bull move of the Jazz Age – that stocks seemed to be trading on hope, but that this was a quantity which could be easily exchanged for hard cash in a speculative market

Tuesday 15th November Roughly two years ago, the authorities in Beijing hit upon what they thought was a cunning plan to reduce the nation’s towering debt levels, by firing public enthusiasm for equities.

Companies, so the plan went, would keep things in bounds by issuing shares into the rally, then use the funds raised to pay down their borrowing and so relieve the strain on the banking sector.

What was overlooked was that the people themselves would start to exploit every last possibility of raising the funds with which to play for the rise – and that aggregate debt levels would therefore climb, not fall.

From November of 2014 through to the start of June 2015, as stock prices more than doubled, margin debt more than tripled – in what was actually only the visible peak of a much larger iceberg of shadow financing.

When the authorities finally took a needle to the bubble, 90% of the gains – and two-thirds of the margin – ended up being evaporated.

Cue the rapid inflation of a real estate bubble of similarly epic proportions to keep the burnt-fingered masses from protesting too much.

From last June to September of this year, the pace of the annual rise in the price of new, first tier city real estate accelerated from an already brisk 8% per annum to a positively blistering 38%, with nationwide turnover in existing real estate also climbing by 30% YOY.

Last month, Beijing acted to break this latest fever, too. As house prices slipped and transaction volumes tumbled, the impact was twofold.

Firstly, the efflux of hot money out of China accelerated so that the yuan suddenly depreciated, racking up a 20 big figure loss – and counting – against the US dollar.

Secondly, what had been an impressive, if relatively selective, rise in industrial commodity prices suddenly went viral.

In three to six weeks, coking coal, iron ore, and steel, put on a spurt of 75%, 65%, and 45% respectively. Things as diverse as rubber, methanol, PVC, and polypropylene rose by a third or more. The five main base metals each clocked up gains of around 25%, as did flat glass and polyethylene. Palm oil and corn jumped 20%.

On Friday night, however, ‘Time!’ was called on this latest speculative enthusiasm. Sharp, peak-to-trough losses of anything up to 13-14% resulted with the knock-on being felt – though not widely recognised for what it was – on exchanges all across the world.

The burning issue now is, if property is ruled out and commodities are being damped down, where next for China’s vast overhang of funds?

Well, just note that the ChiNext/GEM – the wilder, Chinese equivalent of Nasdaq is on the verge of a break higher from the range in which it has been stuck for most of 2016.

Don’t bet against it succeeding in so doing!

Monday 14th November Typhoon Trump continues to roil the world of finance, whistling through people’s portfolios with its heady mix of fear, expectation, and panicked liquidation. Still bearing the brunt of this tempest, bonds and currencies are once again frantically firing off distress flares, left, right and centre.

Though the man himself is doing his best to appear calm and responsible in the interviews he is giving, so far no one is paying heed. The tack he has taken – to try to offer reassurance by declaring that some of the more radical propositions from his campaign were merely attempts to set out a negotiating position – is finding few takers so far.

The market – as is often the case – is far too busy chasing its own tail to stop and reflect upon whether it really has enough hard evidence that the adjustments it is now making in anticipation of the new President’s inauguration will be the right ones. Instead, it is more a case of sell now, ask questions later.

Nor is the violence of the reaction being made any less by the fact that the very same people who have made a multi-trillion dollar effort to drive bond yields down to the unparalleled depths they had attained just a few short weeks ago – our usually garrulous pack of central bankers – have transformed themselves into a pack of dogs who have curiously NOT so far barked, whether in the night, or during normal trading hours.

To return to specifics, US 30-year bonds started the week offered again with yields pushing north of 3% for the first time since January.

Mind you, it just shows how dulled we have become by the previous erosion of bonds’ coupon returns that we are now screaming blue murder about three whole percent – and that after a rout of such epic proportions that, barring the maelstrom set off by the Lehman collapse, such a swift back-up in yields has not been seen since 1990.

In the wake of bonds, emerging markets have again been the whipping boys, with weakness in equities, for example, being aggravated by a simultaneous slippage in their currencies.

Thus, the Brazilian BOVESPA, for example, is off 7.1% in the local real in just the past week, but work that back into US dollars and the losses extend to over 15%. Ditto for Mexico where the Bolsa’s 5.6% decline, measured in pesos ends up as a whopping 17.4% loss the other side of the Wall – er, sorry, the Rio Grande.

Meanwhile, the yen is back trading with a 108 handle – and looks bound for a test of 110, much to the delight of domestic Nikkei buyers. The euro is a whisker away from $1.07, it worst showing since the Fed raised rates last December. The yuan, too, has weakened yet again, touching an 8-year low of 6.86 to the dollar.

So far, the major equity markets have managed to shrug all this off, but every day that goes by without some measure of calm setting in, the greater the risk that people begin to focus not on Trumponomic reflation, but the impact of rising bond yields on buy-backs, buy outs and generally highly leveraged balance sheets.

Blow, winds, and crack your cheeks! rage! blow! You cataracts and hurricanoes, spout!

Thursday 10th November According to the carefully-crafted mathematical myth, markets are perfectly priced at all times, not only because they reflect the wisdom of the crowd, but because that collective is a crowd populated by unerring, unemotional calculating machines, into the bargain.

A little hard on that score, then, to explain the dramatic sea change which has swept over markets in the 48 hours or so which succeeded Donald Trump’s transformation from widely-derided no-hoper to the Lord’s Anointed, the next incumbent of that awe of the multitudes and terror of the nations, the Oval Office.

As the verdict of the electors was revealed, all manner of commentators, analysts, and associated soothsayers spent the next day and night frantically constructing a new, shared narrative around what the imagine Mr Trump will and will not now do, even though most of them had paid neither the man nor his manifesto much in the way of attention up until the early hours of yesterday morning.

Here we all are, so this new fable goes, standing at the threshold of a Land of Keynesian Cockaigne where steel will be poured and concrete laid down on an epic scale, putting the heart back into the American Heartland and keeping the coastal quinoa-munchers safely barricaded into their gluten-free ghettoes, cut off from all hope of a swift return to influence.

The result has been a truly seismic shift in thinking, turning minds away from their prior fixation with the dreary, Bunyanesque landscape of ‘secular stagnation’ – a world of slow growth, ageing populations, and grinding deflation – to picture in its place a throbbing new Jazz Age, where the soaring arcs of achingly slender new bridges span the continent’s divides, carrying smooth ribbons of pothole-free asphalt to arrow through its vastness, linking one freshly humming assembly line seamlessly to the next.

In order to finance this metamorphosis, vast new quantities of debt will naturally have to be issued and – who knows – perhaps some of the wonders of an inflation so long sought by the PhD classes as a cure for our ills, will flicker into red, raw life along with them.

This combination will drive up both nominal and real bond yields, allowing the Fed to pitter-patter cautiously but happily higher in their path as it allows the economy to run gratifyingly ‘hot’. As rates rise and curves steepen, they will relieve the actuarial stress on pension companies and the accounting pressure on banks and insurers as well as squashing flat that awful ‘hysteresis’ which has so far prevented a proper, full-blooded recovery.

But the tale is not finished yet, for the stronger dollar which will surely accompany this industrial renaissance will be more readily tolerated thanks to that lessening of its effect both on America’s trade deficit and the nominal profitability of American business. This will come about once the country is again safely nestled behind those lofty, ‘equalizing’ tariff walls which so many enemies of ‘neo-liberalism’ have for so long wished to see re-erected between them and their foreign competitors.

Elsewhere in the world, higher US interest rates, the rising price of resources, and that same strong dollar will allow the other central banks – notably the ‘overburdened’ ECB, BOJ, and BOE – to extricate themselves from the dead end of ZIRP/NIRP into which they have strayed. Thus can they both assuage the anger of savers and pensioners and simultaneously restore the hope of making a profit to the basic intermediation activities of the Eurozone’s beleaguered banks.

Fired by the inspiring example of what a good, old burst of Reaganomics – tax cuts combined with deficit spending – can achieve, anxious functionaries in all the finance ministries of Europe will then seek to defer the brewing ‘populist’ rising by finally begin to exploit their own ‘fiscal space’, as has long been recommended to them by the Illuminati of world finance at the IMF and the World Bank.

Suitably fired by this still-hot-from-the-oven vision of finally reaching Oz, markets wasted little time in trying to build the implications of the dream directly into their valuations of the various asset classes.

Thus, long-dated US Treasury bonds rose almost a quarter of one percent in yield in the single session after the vote – something which their performance over the past three decades suggests should only happen once every 60 years or so.

Then, the dollar shrugged off its initial fright and pushed onward to what was close to its best level in over three months against the yen and in over eight against the euro, to name only the most important pairing of all those it outpaced.

Doctor Copper, as one among several now-perky industrial commodities, has itself shot up by more than 20% in the past three weeks, to touch a 16-month high and with the move accelerating rapidly in the most recent sessions. Physician, heal thyself, indeed!

In equities, there were some significant shifts, too. Among the groupings in the S&P Composite, steel, heavy equipment, and construction stocks rose around 12% in a bound, while healthcare was thumped for almost 9%. Conversely, emerging markets began to crumble, their relative standing with regard to the S&P reversing from a 15-month high to a 4-month low in next to no time at all.

Resource stocks in Europe, too, added a late spurt to what was already a solid recovery from January’s depths. This late impetus was enough to push the FTSE Miners to a 133% gain over that stretch, even when measured in US dollars rather than in British pesos. Fans of Dow Theory will also relish the fact that with Transports at a 17-month high and Utilities at an 8-month low, the ratio between the two has jumped 15% in November alone.

Hard to believe, isn’t it? After all the central bankers’ fruitless multi-trillion striving to alter the scope of our ‘expectations’, all we actually needed to persuade us that we stand ready to be ushered straight into the Land of Milk and Honey was to hang – metaphorically speaking – the lawyers and to put a blunt-speaking ‘bidneth-man’, in the White House instead!

Wednesday 9th November One may be in danger of surrendering a very valuable hostage to an impitiable Fortune, but – for all the tearing of hair and gnashing of teeth among the bien-pensant classes at their latest rejection by the hoi polloi – the world has not stopped spinning on its axis, nor have financial markets sustained any significant damage in the wake of Donald Trump’s electoral triumph.

True, there were some wild, stop-loss hunting swings in the dark, algo-haunted reaches of the Asian session. The Nikkei fleetingly printed a 7.1% loss, the S&P futures were off by almost 6% and the FTSE was down just over 5% at its worst, but as those latter markets have returned to daylight and thus to a modicum of liquidity, a good deal of bargain hunting has since taken place and the so-called ‘Fear’ indices have fallen back to and even through their long-term mid-points.

Thus – and although we must issue a strong caveat that such calm as there is can be easily dissipated by a careless word or by a sudden panic gripping the nervous Herd – the SMI – boosted by what is perceived to be the lifting of Mrs Clinton’s threat to the pharma industry – was up 1.4%, while Europe, the UK and the US were flat to modestly higher.

Nor have the major currencies managed anything sustainably untoward. The euro is again somewhat shy of the $1.10 mark; the pound is trading at around $1.24; gold has given up most of the $60 it jumped overnight, and even the good, old, safe haven yen – having spiked briefly to within a bid/offer spread of Y101 to the dollar, is now back safely above the Y104 level once again.

That Mr Trump’s election is therefore a matter of indifference is not to be concluded from this immediate reaction, but it may be that the relatively calm reception accorded to his success represents another nail being driven into the coffin of both a punditry and an established political class which once again allowed a note of hysteria to override its pretence at rationality, much as it did with Brexit.

Once again, therefore, those supporting Project Fear largely appear to have scared themselves, and not their ideological opponents.

Of course, everyone now has an opinion of what a Trump presidency will ‘mean’ for financial markets – and the fact that the majority of those opining have read this election horribly awry will in no way lessen the degree of conviction they affect in making such predictions.

Some of the President-elect’s proposals regarding economic policy would seem to be unhelpful at best – though his opponent’s avowed, Big State, tax-and-spend platform was hardly the most appealing alternative, either.

On a more positive note, it may be that the new administration’s foreign policy is less aggressively confrontational – something which would hardly be unwelcome in this era of often unnecessarily heightened tensions.

Ultimately, however, the markets will go back to parsing every word uttered by their central bank overlords and analysing the plus and minus 0.2 percents of each soon-to-be-revised economic release in their time-honoured way.

For our part – and for all the other old timers out there – we will suspend all judgement until President Trump sees fit to advise us whether or not he too ‘does not like broccoli’

Tuesday 8th November Believe it or not, there are things happening in the world which do not depend upon what shade of curtains the new occupant will chose to hang in the Oval Office next year.

In China, for example, the sudden replacement of the high-profile Minister of Finance Lou Jiwei has raised eyebrows about what President Xi will next decide to do now that he has further tightened his grip on power through this dismissal.

That he will feel pushed to do something seems undeniable.

After yesterday’s’ release of another drop in FX reserves, today produced some fairly lacklustre trade numbers – with exports falling at their fastest YOY pace in the past 7 months to leave them at the same level as in 2011.

All grist to the mill of those calling for a further fall in the currency.

Ominously, the renminbi was again allowed to weaken in the Asian session, being settled at a new six year low where it stands less than 1% away from the official parity maintained in the uneasy two-year period which included the Crisis of 2008.

If the current, fairly gentle devaluation is not halted there in the coming weeks, serious questions will indeed be asked of just what Beijing intends.

Back in Electionville, the S&P enjoyed a strong, 371 point rally yesterday as traders began to believe in a victory for the establishment candidate and trimmed short positions accordingly.

Naturally, the momentum has since faded with wait-and-see very much the watchword in these final hours of polling: neither bonds nor equities are thus showing much inclination to budge.

Underneath this veneer of stability, however, there are signs that somebody, somewhere has either been buying insurance or betting actively on a Trump victory: the consensus being that – at least in the short-term – the reaction to such an upset would be negative.

Thus, the ratio between puts and calls bought on the S&P over the past week has been its highest seen since last August, the second highest in 5 and the third highest in 10 years, a lofty three sigmas above that sample’s mean.

Similarly, although there has been no discernible move in the major currencies in the past 24 hours – beyond a slight weakening of the yen – the difference in price being paid for dollar puts, rather than for calls of the same theoretical pay off has in fact moved markedly higher.

Expressed as a percentage, these so-called ‘risk reversals’ vis-à-vis the euro and the yen have traded at levels only exceeded in the rebound from the Crash and the raft of measures brought in to ease the dollar-shortage that had brought about. This same measure of the degree of gold bullishness/dollar bearishness has also climbed to its highest mark in at least a decade.

Evidently, painful memories of Brexit still plague the uneasy dreams of foreign exchange traders.

Either that or some shrewd psephologist has done his sums and decided that, tomorrow, the Donald will point to his opponent and say, ‘Hillary, you’re FIRED!’

Monday 7th November There has been a deal of fuss made overnight about the $40-odd billion fall in China’s mountain of foreign exchange reserves – much of it coming from the same stable of Telegraph columnists and goldfish-bowl headline chasers who were making an equal and opposite fuss about how unfair it was they were rising, a few short years back.

Though we always have to be exceedingly careful in handling Chinese statistics, it does seem as though around four-fifths of that decline can be explained by the Chinese paying back a good deal of the money they had previously borrowed abroad when it was advantageous to do so.

Into the bargain, China has become a net exporter of direct investment in recent quarters. This tends to raise hackles in the countries where they are trying to takeover companies and buy properties. But overall this is a far more wholesome way of having us paying for the surplus of goods we choose to buy from them than if they simply sell the proceeds to the People’s Bank so it can fund government budget shortfalls abroad and fuel the recurring commodity and property bubbles at home.

Besides, even with the present underlying drain of around $50 billion a month in outgoings, we would have to wait until the end of 2021 before they run out, so they’re not exactly on their uppers, just yet.

Other than that, the fact that the Feds are seemingly not going to slap the cuffs on one of America’s two candidates for the presidency –  at least until after the votes are counted – has brought a general sigh of relief to markets around the globe

Japan, Europe, and Wall St were all up by around 1 1/2% in early afternoon; the dollar was generally firmer at around 1.1050 to the euro, Y104.50 and sub-$1.24 against the pound; while gold was whacked for around $20/oz taking it back to a 4-day low.

Remember the old adage that if you owe the bank $100 it’s your problem but if you owe it a $100 million it’s theirs? Well, the problem in Europe, of course is that the bank owes US – the taxpayers, that is – a couple of $100 billion so it’s not quite clear who is on the hook to whom any more.

We say this, because the gain in Europe was led by a move upwards in financials partly triggered by a near 5% rise in HSBC which pulled off one of those wonders of news management whereby a profit which had actually fallen by four-fifths was transformed into an expectations-beating gain after deducting the ‘exceptional items’ related to its cutting loose from an ill-starred investment in Brazil!

I hope my bank manager will be just as understanding the next time I need a little financial forbearance, and let me deduct whatever it was I dropped at the racetrack from my expenses so I can get my credit rating back up to the level needed for a further loan of some stake money from him!

Some hope, I reckon!

Friday 4th November It just goes to show how much matters of a non-economic nature have taken centre stage in recent weeks that the latest US employment report passed off with barely a ripple.

The day had started out on a sour note with the Nikkei suffering a 1.7% loss and Europe trading softer, largely thanks to those perpetual stragglers, the financials.

Wall St. had managed half a cheer by lunchtime, however, with gains of just under 1% showing on the board.

The payroll report was one of those Pick’n’Mix sets of numbers with just enough in it to support either side of the debate and firm enough to keep the December Fed meeting in play without making it a foregone conclusion.

An overall gain of 161,000 on the month (with upwards revisions to back months of a net 44,000) was the lowest addition since May’s shock outlier and was clearly below the last 6-years’ fairly stable average of 200,000 new hires a month.

One-nil to the Fed doves and market bulls.

On the other hand, wages were up a perky 2.8% – the fastest clip seen since the months after the Crash itself – and something which will add to simmering inflationary fears.

One-all, as the Hawks & Bears manage to pull one back.

With the weekend fast approaching, it was more a case of squaring up the short-positions built up over several days of mounting anxiety than of accumulating further exposure.

As a result, bonds wobbled on the release but then rallied to the week’s best levels, with Gilts the star performers in the pack.

Doctor Copper was at 3 month highs, but conversely Chief Engineer Oil was at three month lows while that nervous market Actuary, gold, was unchanged at $1300.

Sterling, too, continued to see positions unwound in the wake of the Brexit decision, taking it back up through $1.25 to the dollar in a burst of late buying which should not yet be taken as a sign that all the currency’s woes are behind it.

Behind the smiles, however, there are clear signs that nerves are fraying. The VIX ‘fear’ index held on to levels close to the top of the past four months’ range; currency vols are also spiking higher from their recent torpor; while junk bonds – usually the first to lead both the charge and the retreat – have suffered a minor attack of the vapours in reversing more than 50bps of the impressive 4% rally staged since February, with dedicated mutual funds in the sector suffering their largest outflows in the past two years.

As these last three are telling us, it would be wise to prepare for things to get very interesting indeed, next week.

Enjoy the break while you can!

Thursday 3rd November Pride of place today must go to the UK High Court’s decision that the infamous Article 50 clause by which Brexit is to be achieved cannot take place without being subject to Parliamentary approval.

Ironically, Lord Chief Justice Lord Thomas ruled that for Theresa May’s executive to do this under the aegis of Britain’s rather shadowy – and arguably outdated – concept of ‘royal prerogative’ would be to deny the Parliamentary sovereignty recognised in the 1972 European Communities Act whose removal of said sovereignty – and hence whose repeal – is the very aim of Brexit.

Confused? Not as much as are the two factions – the Ins and the Outs –  who are back in the bunfight, hurling heated accusations of undemocratic behaviour, hypocrisy, and a lack of respect for the will of the people at one another in that display of sound and fury which passes for mature political debate these days.

Needless to say, we can already announce the winners, for it will be another field day for my learned legal friends who can look forward to another lucrative few weeks’ fee-gathering when the Government, inevitably, takes the matter to appeal.

The immediate upshot of the verdict was that sterling – further bolstered by a grudging climbdown on interest rates by the Bank of England – almost manage to reach $1.25 to the dollar though, to put that into perspective, this is still a big figure BELOW where last month’s ‘flash crash’, bear raid kicked in.

As for the BOE, the newly deified Governor – Divus Marcus Carney, the only man on the planet apparently capable of steering the people of his adopted home through the tribulations of Brexit – unashamedly sat through the presentation of an economic update filled with more than its usual quota of ‘greater than expecteds’ and ‘less than forecasts’.

In rescinding the intent to lower interest rates again, the Bank made some mealy-mouthed allowance for the fact that sterling’s fall is going to mean higher prices for all.

‘The impact’, we were told, ‘will ultimately prove temporary’ so to ‘offset it fully’ – by raising rates and cancelling its QE programme – ‘would be excessively costly.’ Exculpation achieved. Letter to the Chancellor already in the drafts folder

‘Temporary’, by the way, is an interesting word which translates to ‘some time – fingers crossed, touch wood – in 2020’, meaning that our beloved Mr Carney will not even be here to see it happen, even after he completes his newly confirmed full term in office.

The decidedly non-venomous sting in the tail was the weak proviso there were limits – – wholly unspecified, of course –  to the extent to which ‘above-target inflation can be tolerated’.

Just how insubstantial those limits are can be seen from the fact that despite the Bank predicting that CPI will rise from today’s 1.0% to 2018’s suspiciously low-balled peak of 2.8%, short sterling futures over that term do not even price in a full reversal of last month’s ill-advised quarter-point rate cut!

In the wider world, the major indices were little changed from yesterday’s levels, evidence of the lack of appetite for what would only recently have been forthrightly proclaimed as a buying opportunity.

Bonds, conversely, are back under pressure again with the long Bund off shedding some two points from Wednesday’s best levels. Gold is trying to cling to $1300 an ounce and oil is just holding in at around $47 a barrel for Brent.

Lower prices have not brought in the crowds there, either, it seems.

Now, that’s over with, let’s all put our feet up, pour ourselves a glass of something dark and smoky, and tune in to that 24/7 stand-up comedy act which is the campaign to see who will be the American republic’s top – er, well – banana.

Wednesday 2nd November All is not well in markets today, with widespread losses across the board.

Hurricane Hillary or Typhoon Trump – from whichever side of the divide you view it, America’s increasingly scurrilous and spiteful election campaign is helping to lay bare the rottenness at the heart of the Western political order.

As it does, it is awakening the deep-seated unease many participants have long harboured about just how unsustainable are current policies  – and by extension, the market valuations to which they have given rise.

With the Nikkei closing off 1.7%, Europe was in no mood to resist and again slipped close to 1% over the session. In turn this pushed Wall St. towards its lowest point since the start of July, after a slide – which if not yet dramatic – has certainly been the most sustained these past 4 months.

In general, there is that spreading sense of that collective disquiet that the vernacular terms ‘Risk Off’ – i.e., it’s crash hats on and heads below the parapet time for traders.

Don’t keep calm, Do Panic

Several of the classic signs are there. The yen has done a smart about-face and strengthened notably, coming within a whisker of 103 to the dollar once again, while the euro has climbed above $1.11 and sterling has reached the giddy heights of $1.23.

In classic fashion, gold has regained its lustre, trading above $1300 an ounce for the first time in a month after a 4-day, $40 winning streak.

The so-called ‘fear indices’ – measures of volatility on the major stock exchanges have also spiked from the very depressed rates of the summer, climbing both in Europe and in the States to what are close to 4 month highs in each case

In Europe, there is the added worry that – notwithstanding Signore Draghi’s best efforts to suppress price discovery – Italian bonds are trading ever wider, not just against German Bunds, but against their erstwhile partner in the olive belt basket, Spain.

In the 10-year maturity, BTPs, as they are known, have briefly traded north of 160 basis point over Bunds, well up from August’s 110bps and fast approaching the widest – and hence most stressed – in the past two years.

More widely, the sum total of uncleared, cross-border obligations which sit on the TARGET2 system in the Eurozone are mounting steeply and, indeed, if we add in the funds arising from the same safe-haven desire which forces the Swiss National bank to acquire forex reserves, they are actually higher than they were in the nervous summer of 2012.

Whatever it takes, Mario, it clearly takes more than you have so far been able to do.

Tuesday 1st November A rare ray of cheer circled the globe to start the new month as the release of a series of purchasing managers’ surveys helped dispel at least some of the clouds lowering overhead.

From Japan where the version sponsored by Nikkei News hit a 9-month high, west to Taiwan where optimism was at its brightest in 20 months, then on to the Caixin edition on the Chinese mainland and the most positive reading in almost 2 ½ years.

It should also be noted that the Caixin index had input prices putting in their most robust showing in 5 years and factory output prices their raciest in 5 ½. Again, a testimony to what you can expect when you both allow a devaluation of the currency and ignite a wild boom in any number of industrial commodities

Half a world away, there was a similar combination in the UK CIPS survey: The reading dipped a little from last month but was still firmly on the expansionary side pf the watershed, but prices were already showing the strain of the plunge in sterling, with the price gauge similarly at its highest since early 2011.

Finally, the US ISM poll showed the second modest improvement in a row, as industry put August’s dip further behind it.

So with all that good news at hand, markets raced out of the starting gate in November, right?

Well, no, not exactly. China rallied 7/10ths of a percent, Japan was flat and Europe was well into the red column with losers outnumbering gainers by four to one, with Wall Street following suit in early trading.

Oil was again under the cosh though good ole Dr Copper had the decency to print three month highs and gold added around $10/oz to regain its highest vantage since the $50 crash of four weeks ag.

The US dollar has also gone into reverse, slipping below 105 to the yen, and propelling sterling back above $1.22 and the euro up through $1.10.

In that ineffable, Just So story way of everyone on the market beat from journos to talking heads to sell-side smoothies, the story has been concocted AFTER the fact that this is all down to a sudden realization that maybe Her Hillaryship is not such a shoo-in for the Oval Office, after all.

Like all such tales, it sounds convincing enough in hindsight but being distinctly pot hoc in its concoction, it has never, of course, been put to any scientific test of predictive ability.

For my part, frankly, I doubt it holds much water.

If you ask me why the markets are down, I’d say the Russians did it!

Monday 31st October To the superficial observer, October will go down as a time in which nothing much happened, the S&P and the Nikkei basically unchanged on the month and Europe and the UK each off around 1%.

Oil, too, is struggling once more – with losses fast approaching 10% now as the specs who hold over a billion barrels’ equivalent longs on the main exchanges are showing increasing signs of impatience at the unending to and fro of all the OPEC/non-OPEC deliberations.

As we noted, Friday, the equity doldrums stretch back a lot further than just the past four weeks, with the average US stock having made no onward progress since mid-July – a period during which, if you squint just right, you can see that prices have traced out one of those ominous patterns the chartists love so much, the dreaded Head & Shoulders.

Part of the explanation for this may lie in the fact that Corporate Executives are no longer resorting to quite such intensive use of accounting smoke and mirrors to boost their results.

As the Trim Tabs agency revealed, announcements of intent to buy back corporate equity are running some 30% below where they were last year, with the number actually carried out by those companies which have reported so far this quarter off by a not wholly dissimilar 26%, according to Standard & Poor’s.

The reason this matters, in case you were wondering, is that we hardly ever hear anyone talk about the actual dollars and cents a company earns in any given period, but only about the amount it earns per share.

Reduce that latter denominator either by diverting the company’s own internal funds to retiring equity or – more pernicious yet – by issuing debt in order to do so and that headline number rises in inverse proportion, so keeping the stock-option superstars in the C-suite smiling sweetly as the champagne corks pop beside them.

Whether the present moderation has its roots in a lack of organic cash flow or the first signs of a chill being caught from a far more frosty bond market, it is too early to tell, but it certainly removes one very important buyer from the market, namely, the company itself.

Finally, a quick word about the increasingly controversial Governor Carney, over there at the super-soaraway, Bank of England.

We shall pass over our distaste for the immodesty of the statement issued on his behalf that he ‘wishes to be at the helm to steer Britain through the challenges which lie ahead’ and simply point out that if the fate of a nation of 60 million-odd reasonably enterprising, fairly well-educated souls is seen to depend principally on whether this or that unelected technocrat has his hands on the levers of power, it is a sorry testimony to our lack of faith in both free markets and human endeavour and, conversely, to our wild overestimation of the ability of experts and central planners, both!

No matter whether this turbulent monetary priest stays or goes – and it would seem that a carefully orchestrated chorus of support has since assured him of a triumph over the increasingly rudderless new Prime Minister – be assured that Albion’s sceptred isle will be set in its silver sea, regardless – though it may be that the currency in use therein may sink a little faster and the tally of unproductive borrowing rise a little more quickly in one case than the other.

Friday 28th October So far this results season, the school report reads: ‘Shows signs of improvement. Could do better.’

Combined earnings for the S&P are running 3.2% ahead of last year’s third quarter with sales rising a more modest 1.9% – their best showing in the past 18 months.

Despite this, the average stock closed yesterday at its lowest level in 16 weeks and is actually back, trading where it did twenty, long months ago.

As any old stager will tell you, when a market cannot rally in good news, you just KNOW something unpleasant is in the air.

In fact, that nasty smell is coming from the bond market, where a revolt is just stirring at the insanely low running yields and insanely high price sensitivities.

The sickly waft of decay translates into a global bellwether, US Treasury 30-year bond which has seen a 35 basis point back-up in yield this past month – a rise of roughly one-third of one-percent.

That may not sound much, but it means that the price of the security has fallen by just over 6 ½% – and if you consider that it was only yielding 2 ¼% when the slide began, you can roughly calculate that the unlucky owner has already lost three whole years’ earnings.

In Europe, with its even crazier central bank and thus its even lower starting yields, matters are even worse.

30-year German bonds ended September yielding around 0.4% (Yes! Really!) and, in rising to today’s 0.8 of one-percent, they have shed over 9% of their capital value – meaning the thrifty German Burger who volunteered to finance Frau Merkel’s household expenses now needs to cling on until around 2040 to break even on the trade.

How does this queer the pitch for equities? Well, in three separate but mutually compounding ways.

Firstly, stocks have arguably only been driven to today’s lofty valuation BECAUSE bonds no longer represent a viable alternative in many people’s portfolios. Faute de mieux, as they say.

Secondly, to value a stock one must make some effort to discount one’s estimates of future earnings back to the present and that discount factor is directly related to the day’s bond yields. Low yields, high valuations, QED.

Thirdly, many companies have taken advantage of low yields either to buy back their equity – boosting short-term performance at the expense of greater long term vulnerabilities – or the have raised the funds to take over rivals, or used them simply to stay in business beyond their allotted term.

Reversing all of that could be a bloody business – one not made any less sanguinary by the fact that when a trader loses money or faces a margin call on a position, he often tries to compensate by selling a winner.

Much more of this and we might all be pulling up the equity flowers to water the fixed-income weeds.

Have a good weekend!


Thursday 27th October UK GDP for the third quarter produced a gain of 2.3% over the past twelve months. The CBI distributive trades index recorded its best reading in just over a year. And, finally, Nissan gave some assurances that it would not be divesting from its plant in Sunderland.

While more good news for the Brexiteers and more egg to spread on Mr. Carney’s face, there were a few caveats to this trifecta of good news for those who wished to hear them.

GDP’s gains, for one, were all on the back of the service sector while the productive sector shrank once again: a combination one might have hoped the drop in sterling would begin to reverse at some point.

Secondly, the fact that twice as many retailers and almost four times as many wholesalers saw sales rise rather than fall might provoke some alarm when taken with yesterday’s news that consumer credit was growing at its fastest pace in a decade.

Contrary to popular wisdom, it’s very hard to spend yourself rich, and even harder if you are paying for your purchases on the priciest form of credit there is.

Over in the US, there was also something of a mixed bag.

The jobs market improved to the point that both new and continuing claims for unemployment insurance are at depressed levels not seen since the 60s and 70s.

On the other hand, both orders and shipments for so-called core capital goods – those excluding defence and volatile aircraft orders, were again weak – both measures, in fact being no higher than where they were 5 years ago – and, in fact, no better than back at the start of the century.

So more people and less new machinery with which to equip them is the result – and there we all were, expecting robots to make humans utterly redundant, any day now, according to the Talking Heads’ theorizing.

Coupled with the drumbeat of calls from central banks for governments to spend more money, all this has put bonds again under pressure and has also had a marked effect on the measures of future inflation which can be derived from them and to which those same central bankers claim to pay so much attention.

That so-called, 5-year 5-year level is now pushing 2% in the States – the highest since the end of last year and right on the Fed’s supposed target rate – while that in the UK has shot up a full percentage point since Carney last cut rates to hit a 21-month high of 3 ½ percent – well ahead of HIS target, even if he won’t aim to hit it any time soon.

Taken together, all this has meant that, in the past nine months, commodities have outperformed stocks by around 5% and bonds by a whopping 15%.

Change is in the air…

Wednesday 26th October Mario Draghi dared the lion’s den yesterday by travelling to Berlin to defend his policies before an invited audience of German worthies.

As we would expect, he was thoroughly unrepentant and delivered what is now a suspiciously IKEA flat-pack list of reasons WHY interest rates were low – falling productivity, ageing populations, the fact that we all have too much debt to even think about borrowing any more.

None of these, you will note, have ANYTHING to do with the policies he and his peers have been running this past decade or two, they just – – sort of – well, HAPPENED.

As a result, the ECB’s decision to commandeer large swathes of capital market, to jeopardise the businesses of banks, insurers, and pension companies, and to transfer monies in their trillions from old to young, savers to spenders, and North to South, are not only justified but wholly unavoidable, he said, before ending with the newly obligatory epilogue, where governments are begged to roll up their sleeves and get spending  – and that in an election year, too!

Former BOJ deputy, Toshiro Muto might take issue with this – well, now that he is safely out of office, he can, can’t he?

He told Reuters that his successors at the Bank had ‘essentially stopped the bond market from functioning’ and that they had done harm by ‘blurring the lines between fiscal and monetary policy’ thus making each over-reliant on the other.

Since that’s exactly what all the other central bankers now want to happen, we had better hope that Muto-san has wrongly identified the source of his country’s difficulties, hadn’t we?

Stocks were a trifle world-weary, losing 1/2 to 1% and bonds were pushing back to the recent multi-month highs in yield.

The dollar was generally softer following what looks suspiciously like a round of admonitory intervention on the yuan by the PBoC overnight.

Gold was firm but oil slid further to three week lows and natgas extended its current slide to 15% as warm autumn weather in the States wilts formerly rigid bullish resolve.

Elsewhere, it was Pokemon Gone as Nintendo posted its first operating loss in 2 years, sparked by a one third slump in revenue and Apple, as everyone on the planet must now be aware, suffered its first annual sales decline since way back in the Tech Bust 1.0 days of 2001.

Perhaps people are tiring just a little of forking out several hundred francs for a series of determinedly quirky, physically frail instalments of a product with the lifecycle of a Mayfly on a suicide mission.

Let’s not shed too many tears for the boys and girls at Cupertino, though. They still trousered $9 billion in profits in the quarter to leave them sitting atop a $237 billion cashpile – headphone jack or no!

Tuesday 25th October As the battle for the soul of China’s property bubble rages on, the large banks are now reported to be belatedly tightening the rules to exclude those crafty couples who have divorced for that very purpose from each qualifying separately for a loan, as well as to limit the ability of parents and children to combine as joint-borrowers.

The latest reports show that, in several of the hot-ticket, second-tier cities these – and various other restraining measures – have led to a plunge in activity of up to 70% but, as ever with attempts to mitigate the effects of hot money, an alternative may already have been found, just across the Strait in Hong Kong.

There, the media tell us, transactions conducted by ‘foreigners’ (for which we can mostly read, ‘Mainlanders’) are running so far in October at some 35% above the average for the previous four, pre-crackdown months, with stamp duty receipts up by a quarter.

Were this trend to continue, one imagines it would not be something likely to prove conducive to social peace in a colony not a stranger to complaints that residents are being squeezed out of local markets.

The underlying state of the economy can better be read perhaps in the news that – despite the 20-odd percentage increase in money supply this past year, less than 1% more of it passed through the tills of the nation’s sprawling and inefficient State-Owned Enterprises and that the profits they made on it actually fell in the first three quarters.

Debt levels, meanwhile rose by almost 14% – meaning that for every one yuan booked as income, IOUs went up by three.

Still some work to do on the restructuring, Premier Li!

Markets everywhere were generally firmer with the yen’s push towards the 105 to the dollar mark helping the Nikkei to a six month high and the continued rise in commodity prices pushing London’s raft of sterling-denominated mining stocks on to their best levels since the spring of last year.

Some further joy from Europe, too, where the German IfO index hit a 2 1/2 year high, led by – what else – another new record showing for construction.

Double, double, toil and trouble.

Finally, the dismal saga of the 3.6 million Walloons’ ability to block a Continent-wide trade deal threw up two telling little vignettes in Wirtschafts Woche.

One opponent they interviewed was a young woman – evidently unaware of the principle of consumer sovereignty – who, having grown up on a farm, feared cheap Canadian food imports would deny her the ability to pay more– and to force her fellow Walloons also to pay more – for local produce

The other was a twentysomething Greenpeace activist who raged against the ‘Trojan Horse’ of globalization while proudly brandishing the anti-TTIP stickers emblazoned on the back of his iPhone.

Marvellous! Just marvellous!

Monday 24th October A firmer tone to start the week with stock markets from Asia to the US showing modest gains.

In China, the star performers have been the coal mining stocks – boosted by what is shaping up to be a spectacularly ill-judged piece of central planning wherein President Xi’s orders to reduced nationwide production of the black stuff by around a sixth has since led to fears of a shortage, acute enough to send prices soaring by around 60% in just the past few months.

In Europe, the first ray of good cheer emanated from the best set of Markit Purchasing Manager numbers for the manufacturing sector seen in the past 2 ½ years – a gleam of hope soon intensified by talk that the Commission was seeking ways to water down BIS funding regulations so that the Zone’s ailing banks might not suffer a further nail being driven into their collective coffin.

Not quite such good news in Blighty, where the admittedly unpredictable CBI trends survey showed the ugly combination of prices up at their highest since the first half of 2014 with overall order books at close to their post-Brexit lows and hence at 2013 levels once more, despite the incorporation of a welcome, devaluation-led boost to the export component.

Much breathless comment is still swirling around AT&T’s announcement last week of an $85 billion bid for the Time Warner media empire – the biggest deal so far in 2016.

Financial eyebrows have been raised at the hefty multiple of 12 x the target’s EBITDA earnings the deal entails; at the near 20% bid premium (something which bumps up to something more like 33% if one looks back to the period before bid rumours started to circulate), and at the idea of adding yet more debt to an outfit which, with a slate of $120 billion owing to its existing creditors is the most heavily in hock non-financial company in America.

Political eyebrows have also been raised – though largely because, well, politicians feel more than normally pressured to say something to tickle the voters’ prejudices however economically fatuous it may be.

Old stagers’ eyebrows, meanwhile, have been raised on the tantalising parallels with height-of-bubble deal pulled off back in early 2000 which married what was then the largest takeover in history with the declaration a few short months later of the largest loss in corporate history.

The participants? Then high-flying New Era gurus, AOL, and an old-style media company called – Time Warner.

Friday 21st October It says something about the sorry state to which 8 years of ever more aggressive central bank interference with our lives has reduced us that the newswires today were full of plaintive whining that not only did ECB President Mario Draghi not announce any new scheme to destroy capital pricing and to prop up both zombie companies and spendthrift governments, but that he also conducted one of his shortest – and certainly one of his least communicative –  press conferences ever.

What is a teenage scribbler to do if he is not being spoon-fed the text of his next analysis?

Onto the blank surface of Mario’s stonewall, however, an army of financial market taggers has already sprayed their wildly contrasting interpretations.

By saying the Bank had not discussed ‘tapering’ its purchases of securities, he was leaving the door open to announce an enhanced programme in December, said the stimulus junkies.

No, by not promising an extension beyond next spring, he was preparing the ground for its cessation, countered those pining for the good old days of capital markets, red in tooth and claw.

Neither of those, interjected a third contingent. His inability to add to our understanding of what went on in the sanctum sanctorum of the meeting was clear evidence that a violent schism has broken out in the council of our elders.

Whichever of these turns out to be true, for now, the monetary meth-heads who run our markets have had to go without their latest fix and the mood has soured accordingly, though so far it is more a matter of drift that outright selling.

European stocks and the S&P have both been becalmed in a range of around 5% since mid-July – a clear sign of that sort of lack of direction which sometimes resolves itself in a violent correction – and this is October, after all.

Oil has also run out of – err – steam for now, washing between $50 and $52 a barrel and even nat gas – which had enjoyed a largely unremarked 50% run this year – has also fallen almost 10% from its mid-month highs

Draghi’s defensiveness may have helped bonds to their best levels in 2 ½ weeks, but it has also done for the euro – the single-currency having fallen its most for a like period since it bottomed out against the US dollar at the end of February.

Sterling’s early promise is also fading, with the pound due to end the week back under the $1.22 level. A worsening fiscal picture being the latest worry for those in charge of Albion’s sceptred isle.

Ah well, there’s always next week.

Thursday 20th October For once it looks as though the ECB members took a leaf out of the Federal Reserve’s book and turned up, drank coffee, chatted about the weather, collected their expenses, and adjourned for lunch.

No extension to the current programme of Quantitative Easing was discussed, we were duly informed, nor any ‘tapering’ of it – much less a ‘sudden stop’

No, the Bank is not running out of paper to buy, we were assured, and -in general terms – everything is going swimmingly with signs that the good people of Europe are even beginning to expect a slightly faster schedule of price rises in the months ahead (remember that in Central Bank La-La-land, this is held to be a Good Thing, in true Sellar and Yeatman style).

Markets did what they usually do when anticipated events such as this finally take place – they oscillated wildly, if briefly, as both the Blitzschnell algo traders and the achingly slow, wetware throwbacks who trail hopelessly along in their wake probed both sides of the range in order to see where the balance lay between stop-losses and those fresh orders aimed at initiating new longs or shorts.

The initial outcome of this jockeying was to see the euro back under pressure – drifting slowly but seemingly inexorably toward the Brexit-night lows of $1.09 – and for bonds to continue their recent recovery, probing up to 2 week highs in price, lows in yield, as they did.

Though, of course, Mario Draghi stuck to the standard-issue central bank liturgy by telling the assembled press pack that he cannot see any sign of a bubble, nor any shadow of disquieting developments in general, his blindness may well turn out to be a little Nelsonian.

For, as the German arm of the commercial credit bureau, Creditreform trumpeted, in its latest report, this is a ‘Goldener Oktober’ for the German Mittelstand where conditions are at their best for a decade and expectations are rosy.

‘Ein Bau am Boom!’ crowed the group’s spokesman, Michael Bretz, thanks in large measure to the ‘easy finance conditions’ which both businesses and their customers were enjoying, thanks to Mario’s largesse.

And we all know how building booms generally end, don’t we?

But the autumnal glow has obviously spread further across the European heartland. Dutch consumer confidence separately recorded its best levels since 2007 while Switzerland – le franc fort and a struggling watch industry, notwithstanding – reported a record high trade surplus of CHF4.4 billion last month, with exports for August and September combined easily their best ever for the season, up some 11.2% on the corresponding period in 2015.

The time may not be ticking so loudly for Swatch and Hublot, alas, but it certainly seems to be doing so for Signore Draghi.

Wednesday 19th October European equities were directionless today as attention shifted to whether the Frankfurt Music Hall magicians would pull any more monetary rabbits out of the hat at tomorrow’s conclusion of their two-day council meeting.

With both actual inflation data and the market’s implied forward estimates of this climbing steadily upward of late, they really should rest content to defer any ‘Hey, Presto!’ moments until enough time has passed to see if the existing programmes are having the desired effect – but, then, patience has not been a strong suit of Draghi’s ECB, so who can truly say what it will conjure up?

One presumes the Bundesbank contingent, for one, will march in clutching a copy of the latest IVD report on the German property market.

‘An uncontrolled boom!’ was how Focus magazine banner-headlined its coverage of a document which revealed that the price of the average apartment in Frankfurt had risen 19%, that in Cologne by 15% and that in Stuttgart by 11%, over just the past year.

Shame that none of this counts as ‘inflation’ according to the central bank’s principal CPI measure and hence is no part of its ‘mandate’ to control.

Beyond Europe, the main focus of the day was the monthly data dump out of China which, to no-one’s particular surprise, showed that GDP had yet again grown at the officially desired 6.7% per annum pace.

As yawn-inducing as that might be, the numbers did however testify to just how ‘high pressured’ – to use Governor Yellen’s new buzz-word – China’s consumers are at present.

Car sales, for example, are up 13% year-on-year with vehicle production up an even more impressive 31.5%.

The housing bubble, meanwhile, manifested itself in a September sales total which was all of 61% greater than in the corresponding month last year.

So far in 2016, spending has surged ahead by a full two-fifths and the area sold by more than a quarter – from which combination the brighter students in the class can work out that prices across the entire country – dirty, de-industrialized ghost towns, as well as shiny Shanghai suburbs – are up almost 13% from 2015’s levels.

And to think there are some who have been pushing the viewpoint that China is stuck in that mythical economic snare – the ‘liquidity trap’ – at present.

If only, you can hear voices at the PBoC wistfully whispering!

On the back of all this non-inflationary inflation, oil is trading up 1%, safely above the $50/barrel mark again, while gold at around $1270/ounce is enjoying its best showing in almost two weeks.

Sterling continues to make gains on the cross against a sickly euro and the yen – that croaking bird of ill-omen – is a touch stronger at 103-and-change to the dollar.

Now, Ladies and Gentlemen, for my next trick….

Tuesday 18th October A bright start to the day saw European stocks up just over 1% in the morning, led by commodity-boosted resource stocks and some further short covering in financials.

Sterling even managed a pop above the $1.22 mark – a dead cat bounce later attributed to headlines suggesting Britain’s largely antipathetic politicians might have to be given a final say on whether the people’s will is respected with regard to Brexit.

Instead, the pressure switched to the euro, which was again threatening the three month lows below the $1.10 mark – perhaps as positions are unwound on the cross.

On the economic front, UK inflation data came in at a two-year high of 1.5% for the new-fangled CPI measure and a more sprightly 2.2% on the old, RPIY gauge – both of them two year highs, after undergoing a 12-month acceleration which is the fastest in the past six years.

And all that, before the pass-through from higher import costs really finds its way into the shopping basket.

Likewise, in the US, CPI reached 1.5% – again a two-year high and its fastest acceleration in almost five years.

Madame Yellen? Mr. Carney? Any comment?

As those two worthies publicly seek excuses not to have to change course, perhaps we should draw a lesson from the experience of a far more committed practitioner of the sort of one-two, monetary-fiscal jiggery-pokery that our leaders pine to indulge in.

Last year, the cunning plan in China was to reduce the nation’s worrying level of indebtedness by talking up the stock market and so getting everyone to change up their bonds and loans for equity instead.

What the authorities missed was the willingness of the new generation of officially endorsed speculators to borrow their tables stakes themselves. As the stock market soared 150% – at one point accounting for half the world’s turnover – margin debt shot up fivefold to exceed Y2 trillion.

In the wake of the inevitable bust, more stimulus was deemed to be necessary, so once again the spigots were opened. As a result, Chinese money supply has shot up from 4% a year to 24% in the space of the past twelve months, igniting a wild property bubble along the way.

Though Beijing has recently enacted a series of increasing draconian measures to try to temper the fever – the sort of thing euphemized in the West as ‘macro-prudential’ policy – the economic numbers released overnight showed another new high in long-term loans extended to households – effectively in the form of mortgages.

So far this year, no less than 40% of all lending in that vast country has been destined for bricks and mortar, with the total increase climbing to 4.2 TRILLION yuan – or around $625 billion – all of it air which will once again have to be let out or redirected at the next target of bubbly, organized ‘enthusiasm’

Meanwhile, debt levels rise, not fall and the much-overdue industrial and commercial restructuring is postponed once more in favour of chasing the latest get-rich quick scheme.

Do you think there is a lesson there for the rest of us?

If so, it is not one our Nomenklatura seem at all inclined to draw.

Monday 17th October Though the major markets started the week in a relatively subdued frame of mind, there were one or two elements of concern to be found.

Chinese B shares in Shanghai, for example, suddenly plunged around 8% in the final hour or so of trading, ending the session 6.1% lower and thus taking the index from near the top to close to the bottom of the last 5 months’ range in a single swoop.

Being the index denominated in foreign currency, rather than yuan, locals were pointing to the renminbi’s simultaneous fall to a new 6- year low of CNY6.74 as a possible cause – and they were also anxious that this reversal was not the harbinger of weakness in the major indices, as it was when last year’s Mississippi Bubble 2.0 started to burst in the Middle Kingdom.

Saudi, too, was again under pressure as the banking sector continues to struggle with the $180 billion-odd foreign reserve drain, lowered state outlays and mounting stress among its customers.

Since the price of crude cratered, the market cap of the sector has effectively halved, leaving its index a whisker above the 2009 GFC lows as a result.

Crude itself saw a round of selling as New York got into its stride, knocking WTI back through the $50/barrel level and on down to a one-week low.

Not surprising, perhaps, when you note that the combined long positions of speculative players on Nymex and the ICE amount to a record 1.2 billion barrels equivalent – or getting on for two weeks’ global usage.

As the momentum chasers have piled in and the price has climbed, it should also be noted that the commercials have been eagerly rebuilding their hedges, as evidenced also by the widening spread between the price of longer dated put and call options. The implication here is that drillers are increasingly finding today’s levels viable ones – something to which the past 4 months’ one-third rise in the count of US operating rigs also attests.

The cure for high(er) prices, as the old adage goes, is high(er) prices.

Those higher prices are among those that will be causing pain to consumers everywhere – but especially, of course – in the UK.

Not that this has occasioned any wailing and gnashing of teeth from those charged with delivering what they laughingly refer to as ‘price stability’

While the Fed’s Janet Yellen has started to muse about the need to ‘run the economy hot’ in the near future – something surely likely to raise the hackles of the FOMC’s growing corpus of hawkish dissenters – BOE Governor Carney was blithely accepting of the likelihood of a ‘temporary overshoot’ to the Bank’s inflation target – a measure which, as you might therefore deduce has no actual ceiling to it, but only a floor.

Merry Christmas, everybody!

Friday 14th October Markets have been trading well into the green today, with European equities registering gains of almost 1.5% – their best showing in 3 weeks and close the strongest so far in the second half.

The shrewd observer will be aware that much of what passes for financial commentary is all about finding convincing Just So stories to ‘explain’ moves well after they have happened.

But even so, these editorial fables are not entirely worthless, for the real value of such suppositions lies not so much in whether they actually have identified the cause of the move as in what their currency says about what the Herd finds credible.

So, the fact that many newswires settled on some variation of ‘Chinese data removes worries from global economy’ as the reason for today’s outbreak of mass optimism is therefore a fairly telling sign of just how twisted our thinking has become in the face of eight years of Alice in Wonderland central banking.

For the numbers in question coming out of Beijing did not show any real vibrancy in the world’s second biggest economy – on the contrary, they just showed prices were rising faster than they have been for some good while now.

Indeed, taken over the past three months, Chinese consumer prices pushed up at an annualized rate of 4.1% – something which, if sustained in the months ahead, would represent the fastest pace in almost 5 years and which would therefore make real interest rate sharply negative once more in a country supposedly trying to cool off the worst excesses of its already overly loose monetary policy.

But, no matter.

Supposedly, any rise in prices is now to be seen as a boon to human wellbeing on the sort of logic that if a Marathon runner usually ends up with sore feet at the end of his 26.2 miles, if we give him blisters before he starts, we can rest assured that he will break the elusive 2-hour barrier the next time he pulls on his running shoes.

Outside of equities, currencies were fairly steady with 105 to the yen and 1.10 to the euro levels still proving hard for the otherwise perky US dollar to break and gold washing aimlessly around the $1250/oz mark once more.

Sterling, too, was relatively calm at around $1.22 despite the fact that BOE Governor Carney badly spooked an already rattled gilt market by blithely declaring that he would ‘tolerate a bit of an overshoot on inflation’ in order to head off the 1/2 million – yes, you heard that correctly – job losses he and his notoriously inaccurate, ‘forward-guidance’, tea-leaf readers otherwise envisage to lie in Britain’s post-Brexit future.

Those whom the Gods would destroy, and all that…

Thursday 13th October With the release of the Fed minutes from its recent FOMC meeting, speculation has begun to mount as to just how close run thing it was that the members again stood pat on interest rates.

Some have even concluded that Chair Yellen may only just have managed to quell an impending mutiny in the ranks in order to maintain the status quo.  All of which, naturally, increases the market’s assessment that some action will soon be forthcoming.

As a result – and though they have since edged up a few tics – next year’s Eurodollar futures hit a four-month low yesterday, to rest some 50 basis points – effectively two Fed hikes – off the year’s highs.

Adding to a general malaise which is not being helped by the increasingly vitriolic US presidential contest, the confusions of Brexit, or the worrying hardening of the rhetoric between NATO and Russia, China released a set of particularly sickly export numbers and so reawakened fears that global growth is likely to underperform, once again.

By falling 10% year on year to the lowest September total since the crash itself -and that despite the ongoing weakening of the yuan – this shows the sharpening dilemma of a country still trying the impossible feat of trying to re-invigorate its most grossly overbuilt industries, let the air gently out of a giant property bubble, and somehow reduce debt to sustainable levels – and all without allowing GDP to dip much below the iconic 6 ½ % mark.

Given all this, the first stirrings of Risk Off pricing were starting to creep back in to a hitherto overly complacent market.

The VIX ‘fear index’ has pushed up to a four-week high; the dollar has broken higher from the range which has constrained it since the spring; and gold – though itself only washing nervously between $1250 and $1260 an ounce – has finally turned up from the one year lows it had plumbed in relation to a basket of industrial commodities, such as oil and copper.

Meanwhile, as the Marmite wars heat up in Britain, some commentators have begun to wake up to the fact that the casus belli of the dispute between supermarket chain Tesco and food giant Unilever over the proposed 10% hike in the price of the much-loved breakfast spread is likely to be a microcosm of upward revisions across the board.

As anything like that scale of adjustment would clearly blow UK CPI right through the Bank of England’s supposed target, the question is beginning to raise itself of how the MPC will be able to justify the continuation of its recent easing programme.

So far, answer has come there none.

What it does go to show though, is that rather than tying themselves in knots, vainly trying to ignite inflation through buying stocks, bonds, and real estate, Shinzo Abe and his BOJ henchman Kuroda should find some international organisation to quit and then get the main manufacturers to hike the price of natto.

Prosperity assured, at a stroke!

Tuesday 11th October As if anxious to drive his own personal nail in the coffin of a currency which last fell as steeply on his watch, former Bank of England chief Mervyn – sorry, Lord – King of Lothbury – added to the angst surrounding sterling yesterday by telling Sky News that the drop was a ‘welcome change’.

Well, yes, My Noble Lord – a country which runs the globe’s second biggest external deficit (and the largest per capita one among the larger nations) is clearly in need of some re-adjustment if the super-proportion of imports to exports is ever to be addressed.

But it would be nice if that ‘change’ did not become a disorderly rout along the way by scaring the pants off the country’s many foreign creditors.

It would also be helpful, M’Lord, if your successors at the Old Lady were not anxiously trying to ensure that everyone either fleeing the pound, seeking protection against its further decline, or speculating outright against it gets as much ammunition as they need, at as cheap a rate as possible, while they are doing so.

Increasingly there is a sense that no-one very much has a stake in trying to arrest the slide.

Certainly not the many political opponents of Brexit who are all too eager to point at the pound’s plight as the verdict of the ‘impassive’ arbiters of global markets upon what they are anxious to paint as the Leave camp’s abiding folly.

Certainly not the Bank itself, which, wedded to the prevailing fallacy that a little more inflation is a good thing – despite the sorry counter-example of Japan’s faltering efforts – seems to want to try its hand at sparking it via a rise in the nation’s imports of energy, clothing and foodstuffs in a blast of what one might call Westminster Abbey-nomics.

The wider issue here is that the move out of sterling is threatening to catalyse a rise in the US dollar of the kind which global markets have found all too uncomfortable in recent times.

Crucial to that will be the issue of whether or not the euro can hold up in the next few days.

Here – though it’s nothing, too, dramatic as yet – it should be noted that forex exchange options vols are moving up from 2-year lows, with dollar calls trading more strongly than dollar puts.

From little acorns, and all that…

Other than that, markets are flat to slightly lower with even oil threatening to break its two-week winning streak as doubts creep in about accommodating the Russians will be in the face of its rival, OPEC’s, outward show of resolve.

That in itself will be some small comfort to those British firms and householders who must be dreading the next time the fuel bill falls onto the doormat.

Still. If it all gets too expensive to use hydrocarbons to keep the house warm, they can always fire up a Samsung 7, I suppose.

Friday 7th October For once the US employment report produced few fireworks, even though the tally of 167,000 private jobs added registered the second mild disappointment in a row in again falling beneath the past six-years’ average of 200k a month.

One reason for the relative anaemia in hiring might be the fact that while business sales for manufacturers, wholesalers, and retailers have been essentially flat over the past year – and, indeed, over the whole of the past three – average hourly wages are clearly beginning to accelerate.

In the past twelve months, these have recorded a gain of 2.7% – the fastest increase in the seven years since the world economy pulled out its post-Lehman nosedive.

Add in the fact that non-wage costs are also rising sharply – not least for healthcare – and you can see why something of a battle might be developing between a tightening supply of skilled employees and a general inability on the part of their would-be employers to increase turnover.

In comments he made at a major banking seminar in Washington yesterday, Fed Vice-Chairman – and eminence grise of modern central banking – Stanley Fischer, tried to put all this in some sort of context.

‘Close to full employment but with some scope for further improvement’ was his somewhat equivocal spin on the situation, emphasising that while this meant the latest call on interest rates was a ‘close’ one, wait-and-see, alas, was still very much the watchword.

To start the new week, a certain perverse cheer has been taken from the continued rise in the price of oil, with Brent touching a one-year high on continued expectations that OPEC will deliver some meaningful curtailment of supply.

In turn, that helped reverse early weakness in equity markets – resource stocks again to the fore: banks and real estate again lagging, bonds again under pressure.

Sterling has been drifting lower all day, underlining our observation last week that Friday’s dramatic plunge and partial recovery has not yet served to whet appetites in any meaningful way.

One thing it has done is to boost the reading of a slightly abstruse, but widely followed, gauge of the likely course of future prices

As fears set in of just what the fall in the currency will mean for the cost of imports, the so-called 5-year forward break-even inflation rate has jumped from the 2 1/2 percent prevailing when Fred Carney’s Circus were introducing their latest easing measures to getting on for THREE and a half percent today – and so has reached its highest in over 2 ½ years almost in a single bound.

Since central banks have come to set so much store by what these somewhat intangible ‘expectations’ mean for the actual rates at which people borrow and lend in the real world today – as Fischer himself was at pains to make clear last night – would it be too much to expect a little commentary from the Brains Trust residing at the Old Lady, anytime soon, do you think?

Friday 7th October As the witching hour struck last night in London, someone – or something – lurking out in the twilight zone of cyber space pushed a button – whether by accident or design – which sent Her Majesty’s once proud pound plummeting on the foreign exchanges.

In under ten minutes, the world’s fourth most heavily traded currency dropped at least 6% against the dollar – and possibly more if rumours about what went through on less visible forex platforms are true – taking it from an already lowly $1.2640 to an abyssal $1.18 and change almost before you could say, ‘Yours! Mine! Details outside. See you for lunch, mate.’

Though the next hour did restore some sanity to the market, it has to be said that the enthusiasm of any bargain hunters was strictly limited thereafter.

By mid-morning the pound was still trading sub $1.24 – a hefty 28% below the point where it entered the second half of the year.

Nor was this a good time to release weakish industrial production numbers, nor yet another numbingly wide visible trade gap – the latter’s £132 billion 12-month running total a stark reminder of how much Britain relies upon the credit extended to it by its overseas suppliers of coats, cars, chemicals, and cookers.

Not that they’ll be overly cheered at having done so – not when the dollar returns to holding long gilts have cratered 12% in under a month, wiping out 14 months’ worth of hard-won gains in the process.

Locals, too, will soon be rueing the higher bill presented for such imports – not least for energy – with the sterling price of oil up 20% in the past 2 weeks and by 120% since January.

Time to knit granny a nice, thick cardie for the winter, one fears!

But it’s not all gloom and doom.

For one thing, that fall in the price of gilts corresponds to a nice little 35 basis points rise in their yields, taking them back to the levels of late July.

Given that August’s Bank of England-driven decline had wiped £112 billion off the funding levels of the country’s defined benefit plans – and given, too, that equities are now handily 4-5% higher in terms of eth British peso – some much needed respite should be reported there, this month.

Then there’s the FTSE’s batch of mining stocks – big names in global dirt moving such as Anglo-American, BHP, and Antofagasta.

Any fund manager who was smart enough to accumulate these in the dark days of winter must be feeling pretty chuffed with himself as they’ve risen 125% in the nine months since – something only matched in the past two decades by the rebound from the depths of the Lehman crisis itself.

Who says there’s no such thing as a silver lining? Or a copper one, or a nickel, or a zinc…

Wednesday 5th October Over the past week, there has been subtle shift of emphasis on the outlook for bond yields – perhaps THE pivotal influence on asset prices in general.

In Asia, there is a growing feeling that the Kuroda BOJ has ventured well into the realm of diminishing returns –

An unsourced story has emerged that ‘unnamed’ ECB officials have already begun discussing just how they will go about removing a stimulus they have just enacted –

British PM Theresa May broke all sorts of taboos in upbraiding the Bank of England for its policies  –

and there have been enough bearish comments from the likes of the Fed’s Lacker, Mester and Evans to keep everyone on there on edge, too.

As a result, the US long-bond has shed 3 ½ big figures so far this week – with its yield correspondingly rising 16 basis points – and its German equivalent has fared even more poorly, sliding 6 whole points as its yield shot up 20 bips.

This shift in the Zeitgeist has been strengthened by the increasing number of official statements of the bleedin’ obvious to the effect that all that current policy is doing is to drain banks, insurers, and pension companies dry while allowing the world’s debt mountain to lower ever more menacingly above us.

The IMF for instance now estimates that the global debt overhang steeples at a near-incomprehensible $152 trillion – or around $17,000 for every man, woman, and child on the planet.

So you can see just why there may be grounds for concern – even if these do emanate from the very agency which has been cheerleading the very policies which have helped it grow so rapidly in recent years.

All this has been enough to keep the dollar bid, especially against the yen, in a move which has seen a clear break of the 25-point downward trend of the first half of the year and which has afforded the greenback the luxury of a four-point cushion between it and the talismanic Y100 level.

The euro, too, is seeing its trading range squeezed into the nose of one of those chart formations which gets every technical trader drooling and sterling is still desperately trying to find a bottom, having traded as low as $1.2640 this morning.

A similar story for gold where Tuesday’s thumping $50- buck loss has not excited the appetite of any notable constituency so far, leaving it bound for the mid-point of the spring’s $1200-$1300 trading range.

Conversely, continued chatter from the various oil producers has kept the momentum chasers very much in the game, allowing crude to chalk up a 7-day winning streak and taking the black stuff around 15% higher to touch its best level in the past three months.

Swings and Roundabouts, it is.

Tuesday 4th October All eyes on the UK where the pound has finally broken its post Brexit floor to hit its lowest level since Paul Hardcastle made it to No 1 with his stuttering, anti-war track ‘Nu-nu-nu-nineteen’, back in the late spring of 1985.

Ostensibly, this has been the result of the increasingly prevalent talk of the inevitability of enduring a ‘hard’ Brexit process – by which, some would say, what is meant is an actual exit, not a sneaky Europhile compromise to preserve much of the status quo.

Ironically, all this gloom comes as yet more of the short-term economic indicators are suggesting that much of the initial fear engendered by the vote to leave has dissipated.

The Markit/CIPS manufacturing survey, for example, showed a smart rebound to reach its best overall levels in 2 years, with export orders at their strongest in 2 ½.

The construction industry version also moved higher to regain the pre-referendum levels of May, with residential construction contributing mightily to the upswing.

Amazing what historically low interest rates and generationally low exchange rates can do for you, eh?

But don’t mention that to the Bank of England which seems to be reading the charts upside down as part of a post-hoc justification of its predictions of imminent doom.

The latest back-flip the Bank seems to be executing is that, having ignited a mini-bubble in commercial property by forcing investors to seek out earning assets wherever they can find them, it now fears that the withdrawal of the foreign contingent among them will tighten credit because banks will be henceforward be less willing to accept firm’s property holdings as collateral if their prices continue to be pressured.

If that sounds something that would be welcomed on ‘macro-prudential’ grounds before the sector got completely out of hand, you would be right. Instead it seems it is being set up as yet another convenient excuse to carry on regardless with its controversial current shot of QE.

Sterling’s ills have been the dollar’s boon and that, in turn, has finally knocked gold back down through the $1300 mark as RISK seems to be coming decidedly back ON once again.

Now at its lowest level since – you guessed it – the Brexit shock, the yellow stuff could easily lose another $50 an ounce, if the charts are to be trusted.

And with what must be an increasingly uneasy crowd of speculative net longs on COMEX, anxiously clutching what amounts to the paper equivalent of 900 tonnes of the stuff, it might just be the time to do so.

Monday 3rd October After a week of high drama, Deutsche Bank shares did not open for trading today.

Then again, neither did those of any other German company – it being the Reunification Day holiday in the Heimat.

Had you worried there for a moment, didn’t we?

In the respite that provided, the big news was the friendly merger of two of the giants of asset management – the UK’s Henderson and America’s Janus – in a $320 billion marriage driven, said the British partner’s CEO Andrew Formica, by the need to spread the pair’s ever-mounting regulatory costs over as many assets as possible.

Mr. Formica also cited the competition being faced by these two goliaths of stock-picking from those increasingly numerous passive fund investors who prefer to have the proverbial chimps throwing their far less expensive darts at the board instead.

Given that admission, one can only wonder what the increasing tendency for central banks to join their ranks will do for the new company’s prospects in the days ahead.

Elsewhere, crude continued to creep higher, with Brent again trading just north of $50 a barrel and registering a seven-week high in the wake of the still slightly shaky deal struck between OPEC’s fractious membership last week.

Not that this did much to calm nerves in Saudi Arabia where the Tadawul stock index slid to a 5 ½ year closing low, some 52% below its peak of late 2014.

Since oil began its collapse in late November of that year, Saudi has suffered a slump in state revenues sufficient to blow its budget deficit/GDP ratio out into the teens, while its mountain of forex reserves has so far fallen by $180 billion, or by around a quarter of the starting value.

As a result, its money supply has been thrown sharply into reverse with the post-Crisis gallop of 18% a year increases crashing to a 10% per annum decline.

Now that really IS what you call deflation.

The panic in official circles has become palpable. Despite the need to defend the Riyal’s peg to the dollar, the pain being felt by the banks was enough to warrant an emergency injection of $5.3 billion in liquidity last week.

Sadly, after announcing swingeing cuts to the generous bonuses and allowances it traditionally pays to its state employees as part of its attempts to placate the disenfranchised masses, it then had to rush to those same banks to tell them not to foreclose on the loans of any of their customers whose finances had been damaged by these reductions.

It looks like hot new sport of financial whack-a-mole is fast becoming eligible for inclusion in the 2020 Tokyo Olympics

Friday 30th September Once again, Deutsche Bank dominated the headlines after news broke late yesterday that several of the hedge fund clients to whom it provides prime brokerage services had been drawing down any surplus cash in their margin accounts – ostensibly so as to reduce their credit exposure to the bank in the event that it should suddenly fail.

Resonant as this was with the chain of events that led to Lehman’s demise eight years ago, this immediately sent shivers throughout the financial world and made for a very rocky opening to the day with Deutsche itself plummeting almost 9% at its worst.

Here one should bear in mind that the kind of bank run nowadays to be dreaded is not so much the Mom’n’Pop queue around the block of the kind which brought Jimmy Stewart to despair in ‘It’s a Wonderful Life’ as much as a contagion of distrust among its wholesale and institutional counterparties, such as this action might have signalled was beginning to break out.

Here, one might idly wonder how much of said hedge funds ‘surplus’ cash originated in the positions they are holding against DB itself, positions which would hardly fail to show more of a notional profit were they somehow to generate even more adverse publicity for it.

But that way madness lies, so let us just note that short-term CDS spreads rocketed up to levels that – for the lower tiers of underlying debt – exceeded those seen when Lehman nearly pulled the temple in about its head by almost 50%, so let no-one imagine this is not being taken very seriously indeed.

The mood, however, soon changed in one of those unpredictable switches of sentiment. Part book-squaring into week-, month- and quarter-end perhaps; part based on a useful – and so far unconfirmed -rumour that the DOJ was ready to reduce its demands on the floundering behemoth by almost two-thirds; and part by a belated appreciation that CEO Cryan’s refusal to raise more capital – and the German government’s public stance against stepping into the breech – was a gambit aimed at not giving the American legal buccaneers an even bigger booty for which to aim.

Whatever the real reason, the shares soon underwent a very welcome renaissance, to erode all the day’s losses into the close.


On the economic front, the dear old UK saw its current account widen once more in the three months to June, leaving the running total for the preceding 12 months at a record-breaking £109 billion – almost the entirety of that shortfall being due to an over-spending UK’s dealings with a European Union supposedly poised to make trade between the two as difficult as possible in future.

Off you go then, Jean-Claude!

Thursday 29th September In yet another twist to the mad, mad world of mainstream monetary policy, HK has been desperately seeking means by which to curb its rather too buoyant property market.

Imposing what is known in the jargon as ‘macro-prudential’ measures – i.e., screwing ever more bolts on an empty stable door – the Hong Kong Monetary Authority has tried to dampen enthusiasm for real estate by limiting the ratio between mortgages and the value of the property being bought with them to as little as 50% on the most expensive homes.

Unfortunately, that does not stop non-bank lenders – over whom it has no control – from teaming up with major developers such as Centaline to furnish eager borrowers with up to 90% of the purchase price of new apartments or, amazingly, to do so at up to 2 1/2 percentage points BELOW the prime rate.

The result? The highest sales of flats in the HKD 5 million range in a decade and such a clamour for high-end property that Sun Hung Kai jumped the asking price for one such marquee unit by no less than 14%, in a single bound.

Over in Mainland China, the low interest rate policy in place has unleashed what is widely being described as ‘panic buying’

Shanghai prices are up over 30% in the past year, those in Beijing by a quarter; while, in boomtown Shenzhen, 11 so-called ‘pigeon cage’ apartments of six whole square metres recently fetched as much as $130,000 US dollars!!

Couples are even said to be divorcing to reduce their tax liabilities and so afford bigger loans while some otherwise ailing companies in unrelated industries are bolstering their financial statements unloading all surplus property they can into the rush.

Nor is this phenomenon limited to the Far East.

As the German IfO institute remarked last week, its construction indicator ‘continued to soar… Assessments of current business reached an all-time high and are even expected to improve further in the months ahead.’

In Denmark, the average flat is 40% more expensive than it was four years ago – a rise just possibly linked to the fact that some lucky punters are being paid to take out mortgages there.

In Sweden, too, prices are up 12% in the past 12 months and are on track to double in real terms in under a decade. The local Riksbank, however, is playing the game of ‘Move along there. Nothing to see’, releasing ‘research’ which conveniently ‘proves’ that Stockholm houses are not overvalued.

The report concludes that ‘a rise in interest rates risks a rapid fall in prices’ – who knew? – so ‘various types of policies’ – there’s that stable-door again – should instead be used to limit borrowing

No, there’s no inflation anywhere to be seen – at least not where those setting interest rates are looking!

Wednesday 28thSeptember Some modest cheer today as Deutsche Bank took a pause from its 20,000 Leagues Under the Sea act after CEO John Cryan announced he had managed to offload Abbey Life Assurance to the UK’s aptly-named Phoenix Group for what was said to be £835 million, thereby avoiding any immediate need to tap shareholders for more capital.

Don’t get too excited though, folks. Handy as this is, it is only enough to cover around one-twelfth of what the US DOJ is demanding with menaces from the bank.

An added fillip for DB came with a report in Die Zeit – officially denied, as we might expect – that the authorities were preparing contingency plans, should a rescue be needed though, this might sit ill with Bundesbank Board Member, Andreas Dombret.

In a particularly feisty presentation, he roundly criticised governments for offering their ailing ‘Zombie’ banks too much support and made much of the obvious analogy between the 28-metre long, 7-metre high skeleton of a diplodocus which – for fund-raising purposes –  currently nestles in Commerzbank’s main foyer and the host institution itself.

For his part, ex-Buba chief and now CEO of UBS, Axel Weber, seemed to be thinking that Dippy – as the specimen is affectionately known – might be a better metaphor for the central banks themselves.

Given such things as demographics and structurally lower growth, Weber told a Bloomberg interviewer, that the whole motley crew of them should focus on things other than their infamous 2% mandate – something which he said was clearly a ‘target of the past’.

Yet another recently-retired central banker – this time Charles Plosser, former president of the Philadelphia Fed  – also sounded as if he’d like to send his colleagues on vacation to the Yucatan, there to await another asteroid strike.

The Yellen Fed, he said, kept insisting it was ‘data-dependent’ but never quite managed to communicate just what data it was dependent on and instead, in his words, just kept, conjuring up reasons not to act.’

Untroubled by this torrent of criticism of their guardian angels, markets crept into the plus column despite a fairly lacklustre durable goods report out of the States.

Both euro and yen were broadly unchanged against the dollar at 1.12 and par-fifty, respectively, while gold continued to drift gently lower to $1325 an ounce and oil was stuck around the $45 a barrel level

In Vienna, Herr Dombret concluded his address by expressing the somewhat wry wish that:

‘I hope we can come out of the crisis a little faster than the five million years it took to achieve the end of the dinosaurs,’

I wouldn’t bet a first edition of ‘the Origin of the Species’ on it, Andreas.

Tuesday 27th September The autumnal blues are still effecting as European stock markets trade around 1% lower again, led by a banking sector which increasingly risks being trapped in a vicious cycle in which the threat of dividend suspensions and even, in the worst cases, regulatory intervention, limits the ability to sell new stock and so improve the companies’ fortunes.

Everyone’s favourite whipping boy, Deutsche Bank, was again under the cosh, slipping a further 2 ½ %, taking its losses for just the past three weeks to nearly a quarter of its starting price.

Pressure was again evident on its CDS spreads, as these moved another 20 pips higher to come within sight of their most lofty since those seen at the height of the Eurocrisis, back in 2011.

A degree of spill-over also took Credit Suisse to a 3.6% loss, leaving it at a one month low. CEO Thiam will have endeared himself to no-one by choosing just this moment to declare that the bank was doing fine in her native Switzerland and that ‘negative interest rates’ seemed to ‘work in a small country’.

If there is an economic rationale for such an assertion, I am sure there will be plenty of his peers from Swiss savings banks, health insurers, and pension companies eager to hear about it, next time he pops across Paradeplatz for a coffee in Sprungli’s.

Oil gave modest ground as it becomes more apparent that the divide between Saudi and Iran is as wide as ever: the first offering optical cuts which would only accommodate the usual seasonal swings; the latter wanting to carry on with its post-sanctions expansion to at least 4 Mbpd from the present 3.6.

If OPEC cannot come to an internal agreement on dividing the spoils, all those frustrated oil bulls – -trapped in an ever-narrowing trading range – will soon be asking themselves how they ever hope to persuade not just the traditional non-OPEC giants like Russia, but also newcomers, like the Americans shale drillers, to play ball, too.

Highlight of the night was the Mexican peso which responded to early impressions that Mr. Trump had not prevailed over his opponent in the US Presidential debate by posting a 2.5% rally, very much against the spirit of its recent trend.

One should not break out the Reposado just yet, however.

Among other ills, that sagging oil price may yet drive the currency onwards to a symbolic 20 to the USD dollar where the peso would achieve a halving of its value in the past 8 years, much as it did in the previous 13 years and the 5 before that, and the 3 before that and …. You get the point!

Monday 26th September A sour start to the new week as the central bank fairy dust lost some of its potency after a weekend’s reflection.

Not helping the European session, China suffered its biggest drop in over three months, taking the local index to a seven-week low. Volumes have been weak and margin debt declining of late as all of the speculative focus has been on the Middle Kingdom’s rip-roaring housing markets instead.

Given that this argues that even Beijing’s Herculean efforts to keep the party going can’t pay for two bubbles at the same time, stock traders were in no mood to resist when the People’s Bank undertook the biggest drain of funds seen for six months.

Over in Japan, the continued puzzlement at what exactly the central bank there intended to do – a perplexity not dispelled by Governor Kuroda being reduced to insisting somewhat unconvincingly that ‘There are NO limits to  monetary policy and nor is it helpful to speculate about such limits.’

From a man who invoked the spirit of Peter Pan to much derision a few months ago, this seems very much a case of I DON’T believe in fairies. I don’t, I don’t!’

Not exactly Miyamoto Musashi, as far as strategy goes, is it?

As a result of this vacillation, the yen strengthened back to Y100 – and that was pretty much that for the Nikkei.

Following all this up was Deutsche Bank’s latest slump – this time triggered by reports that Chancellor Merkel was insisting that ‘Wir schaffen das nicht!’ – -i.e., that there would be no state aid for the struggling lender, Too Big To Fail, or no.

She also insisted that she would NOT be getting involved in the bank’s fight with the US Justice Department, proximate source of the ailing giant’s latest woes.

The stock fell more than 6%, taking it to new, record lows. Its Credit Default Swaps also jumped more than 20 points to knock once more on the door of the 250bps mark as speculation swirled about its future.

This has reduced the bank’s market capitalisation to a mere $16 billion – barely more than that arch peddler of the insubstantial and instantaneous, Twitter, commands.

Not much of a platform on which to perch $2 trillion in assets and more derivatives than the human mind can comprehend, you might think!

Finally, OPEC is in full force with one group trying desperately to gee-up the price and the other – perhaps more worldly-wise – contingent trying equally hard not to raise false hopes for fear of triggering an even deeper rout if the meeting in Algeria comes up empty.

That game of rhetorical ping-pong did manage to buoy crude to the tune of around $1 a barrel, but essentially left it still stuck fast in the middle of its recent trading range.Tuesday 27th

Friday 23rd September ECB head Mario Draghi was at his contemptuous best yesterday, effectively denying all responsibility for the parlous state of European banks and telling them imperiously that they needed to ‘change their business model.’

Instead of his policies, it was the ‘overcapacity’ in the banking sector which was ‘clearly exacerbating the squeeze on margins,’ he went on to tell a Frankfurt audience, effectively expressing his desire for there to be fewer lenders operating in the Eurozone.

While this is all very well and true, it is a bit rich coming from a man who has spent his time in office taking ever bolder steps to prevent either those same banks – or the tottering state treasuries with whom their fate is so closely bound up – from facing the invigorating discipline of the free market.

Markets responded to his strictures by sounding a suitably sour note with the banks – principally those in Spain – leading the broader European indices lower.

Indeed, position-squaring dominated much of the session, with stocks, bonds and commodities all generally paring the gains enjoyed during the course of the week.

What little excitement there was came from the forex market where sterling which suffered another bout of the Brexit Blues on the news that BoJo would probably be triggering the all-important Article 50 withdrawal procedure early next year – assuming that that stern Mrs. May lets him, of course.

On a relatively quiet economic front, the latest composite Purchasing Managers’ Indices from Markit garnered some early attention, showing, as they did that growth was at its least vigorous in Europe since early last year.

Within that same Markit report, it was, however, interesting to read that the dragon of inflation might finally be stirring in his sleep, with the firm noting that higher input costs were increasingly being passed onto customers, in a fashion not seen these past 18 months or so.

There was also more evidence of the intoxicating effects of low interest rates on the housing sector coming from the Netherlands, where the Statistics Office reported that prices are rising at their fastest rate in 14 years and where, far from being discouraged by having to pay up to secure their dream homes, the good Dutch Burghers have forked out a third more to secure them than they did in the same period in 2015.

The influential German IfO institute helped corroborate this trend by saying that its routine survey of independent architects had this group of economic weathervanes reporting the busiest conditions they had experienced since the Reunification Boom at the start of the 1990s.

That particular episode eventually required interest rates of 10%, not 10 basis points, to sort out, you might recall.

Are you watching, Mario? 

Thursday 22nd September Once again, the US Federal Reserve met, deliberated, ate cucumber sandwiches, and decided –  to do absolutely nothing…

In what has become a mark of the Yellen Fed, the bank, which had spent the last several weeks prepping markets for the prospect of the gentlest of increases in the rate at which it provides it with overnight funds, quailed at the prospect of actually doing so – much to the annoyance, one might suspect, of its counterparts at the Bank of Japan who would dearly have loved to see a little extra inducement for people to sell the yen and buy the dollar instead.

In remarks which followed the decision, Janet Yellen was her usual, somewhat rambling self – talking of how the Fed was still ‘data dependent’ – i.e. that it would await the first patter of raindrops before searching in the cupboard for an umbrella – but then boasting of how it was ‘forward-looking’ and of how it did not favour a ‘whites of the eyes approach’ to economic overheating!

The case for a rate hike was similarly said to have ‘strengthened’, but clearly had not strengthened anywhere near enough to warrant an actual response!

In the short-term the bulls have been given their head once more. Bonds have now recovered around half of their recent, brutal decline and stocks are either at or approaching new highs. The VIX volatility measure – the so-called ‘fear index’ – has dropped to a reading of 12.5, well off the highs of 20.5 seen two weeks back. Gainers in the S&P500 yesterday outnumbered losers by 470 to 32 on what was almost a 10:1 up/down volume split.

And, the good mood carried over into the European session with 447 of the Bloomberg 500 making the green column by lunchtime, led by miners and other resource stocks as thoughts again turned to what all this central bank largesse might mean for commodity prices in the coming months.

Buyers at these lofty levels might take solace in the fact that the Fed Chairwoman assured us that ‘asset valuations are not outside of historical norms’ – i.e., that there is no bubble anywhere in view – though they might also pause to reflect that she then repeated the economists’ usual weak exculpation that no-one could actually identify a bubble as it was happening, but only do so well after the event!

With bond yields currently beyond all precedent and stocks only topped on many of their traditional measures by readings seen at the very height of the Tech Bubble, many would disagree with Dr. Yellen – though the expression of their dissent is not likely to outweigh the eagerness of the momentum crowd, just yet, one imagines.

Wednesday 21st September In a striking testimony to just how much we have all been spoiled by the past 8 years of increasingly desperate and evermore impatient central bank intervention, the latest Wheeze from the Bank of Japan – something it calls ‘QQE with Yield Curve Control’ – was greeted – if not exactly with a yawn – then certainly with a loud grumble of dissatisfaction.

By forgoing any immediate push further into negative territory for short-term rates and by simultaneously pledging to peg long-term yields at around zero, the Bank seemed instead to be paying attention to the plight of its banks and insurers who were being starved of a way of to make ends meet.

At first blush, then, this shift seemed to signal an end to the fireworks which have been routinely set off by one of the world’s most devilishly ingenious monetary authorities these past few years.

Conversely, one could see it as setting alight the possibly lengthy fuse which nonetheless leads straight to a very densely packed powder-keg.

The Bank, you see, has effectively pledged unlimited sums of freshly printed money to keep yields from ever going appreciably above zero –  even, in exceptional cases, for maturities out as long as 20 years.

Having done this, it has also promised not only to drive the rate of increase in consumer prices up to its hallowed 2% a year objective, but actually to force it THROUGH that rate, explicitly aiming to drag the retrospective average up to that mark after a long period of stubborn resistance on the part of what it literally castigated as the ‘backward-looking’ Japanese people who fall under its sway.

What that would mean was that anyone owning bonds would see their purchasing power erode by more than 2% a year yet – if they were ever to tire of this stealth taxation – they would find a fixed bid for their paper in whatever size it took to absorb their effort to sell. Thus, their repeated attempts to escape would boost the money supply further and so potentially push CPI on faster and faster until – well – KABOOM!

As a first reaction, local banks and insurers soared 6%, while the yen strengthened on the somewhat short-sighted view that not as much more of it would be created NOW, today, as an avid short-seller might previously have been hoping.

The corresponding dip in the dollar helped send gold up as much as $14/oz and simultaneously gave a modest, pre-Fed fillip to world stock markets.

Given the implicit intent to monetize everything in Japan and to remove all interest risk from borrowers of the yen with which to buy it, a more sustained move into the metal might not be too hard to envisage in the months ahead.

Tuesday 20th September With the wait to see what tricks the Bank of Japan has up its sleeve almost over and the will-they/won’t they agony of the Federal Reserve decision also due to end tomorrow, markets have been edging higher again on the assumption that the only surprises likely to emerge will be good ones – at least from an equity trader’s perspective, if not necessarily from that of a cash-strapped pensioner.

A mark of the general insouciance was that the Nasdaq index managed to make a minor new intraday high on the very eve of the meeting – thus briefly setting a new highwater mark all of 0.6% above the one it reached way back at the height of the first Tech Bubble in March 2000.

Fed or no Fed, crude oil again defied the bluster from representatives of the producing nations, shedding a further 1% to take the last two weeks’ total loss to 10% and so to a six-week low.

This came even though Algerian Oil Minister Noureddin Bouferta had tried to inject a note of resolve into proceedings by saying that, if a degree of consensus were to emerge at the ‘informal’ gathering he is hosting next week, he could envisage OPEC’s fractious members immediately convening an extraordinary meeting in order to implement some actual policy changes.

Unfortunately for him, investors ignored his plaintive cries of, ‘Wolf!’, being minded instead to pay greater attention to news that Saudi Arabia had managed record levels of both output and exports last month – the latter due to its growing ability to utilise natural gas in place of oil when trying to keep its citizens comfortably cool during the hot, baking months of the desert summer.

Given that the Kingdom’s foreign exchange reserves alone have dropped by around a quarter – or some $180 billion – since the oil price collapse of late 2014 – the main gambit of the cartel’s members seems to be to try to make up in volume what they are otherwise losing in price – a dog-eat-dog stratagem none of them are likely to voluntarily abandon any time soon.

Finally, whatever dash new PM Theresa May cut on her first jaunt to the UN, forex traders were left distinctly unimpressed by European carping at the UK’s negotiating tactics.

The softest of soft targets at present – especially with a central bank seemingly happy to see it continue to fall – sterling thus continued what has been a 5 big figure slide versus the greenback to sub-$1.30, leaving it perilously close to the three-decade lows printed in the aftermath of the Brexit vote itself.

The fun would really start if THAT level were to break in the next few days. 

Monday 19th September A solid start to the new week with those former wall-flowers, the resource stocks, being asked to dance for the first time since summer began as Anglo American added 6% and Glencore put on 5% before lunch.

In an otherwise quiet session, there was no shortage of anecdotes to show that the lessons of the Lehman collapse 8 years ago have been quietly forgotten under the onslaught of central bank unorthodoxy.

For example, the FT cited a Dealogic report which showed that 2016 was on track to match – and possibly even to top – 2007’s fin de siècle slew of non-sovereign issuance, with borrowers churning out nearly $5 trillion and counting in new securities, so far this year.

That led those perennial Cassandras at the Bank for International Settlements in Basel to spend much of their latest quarterly analysis looking askance at both credit markets – not least those in China – and at the elevated valuations prevailing in equities.

‘Dissonance’ was the word they kept using to describe the relation between the two – a word which we can only presume is a euphemism for ‘central bank-blown bubble’.

Digging into that same report, one could discover that international bank lending to what are called drily ‘non-bank counterparties’ in the Cayman Isles (read: hedge funds) has attained its own new record this year, falling just short of $1.2 trillion at the end of March.

That left the global gunslingers packing a quarter more leverage than they did when the world nearly stopped in its tracks, back in the Dodge City days of 2008.

To put all these mind-boggling numbers into context, consider that just this one corner of the global debt market has seen $275 billion in new lending extended over the course of the past two years.

At around $12 billion a month, or $380 million a day, this means that, just since your correspondent started talking, some red-braced high-roller, somewhere in the financial casino, has tapped his credit line for a further $650k with which to play the market.

Any wonder why stocks, house prices and any manner of ‘collectibles’, such as old cars and modern art, keep rising in price in these supposedly deflationary times?

Friday 16th September First focus of the day was the news that the somewhat wryly-named US Department of Justice had demanded a cool $14 billion from the already beleaguered Deutsche Bank to make amends for what the DOJ insists was a case of sustained malpractice in the market for residential mortgage-securities during the era of the Big Short.

DB shares dropped 9% in reaction – wiping some €1.6 billion off its market cap – and its CDS spread – -a measure of its creditworthiness in which lower is better – rose 15bps to 210.

Dare to mess with Apple, would you?  – was the cynics’ response to what many would see as yet another attempt at extra-territorial tax-gathering by the politically ambitious in Washington.

In the wider world, after six days of heavy selling, bond markets had begun the session in a much better humour, retracing all of the past two days’ losses before the US Consumer Prices report came in a touch firmer than had been reckoned by the collective drying of economists’ fingers in the air and so promptly pointed them southwards again.

The dollar strengthened reflexively against the euro – unwinding all of the weakness caused by Governor Brainard last week – and gold pushed closer to the key $1300/oz mark

On the face of it, a miss to the upside of one-tenth of one should not have been too dramatic, but this IS all part of the countdown to Decision Day, remember, so tolerance of anything which might adversely sway that decision is strictly limited.

Of course, there are almost as many versions of the price index as there are one-handed economists and squabbling Fed members to argue over them, so it could also be pointed out that the so-called core index – to which the Fed used to pay more attention – came in as high as 2.3% yoy, equalling its fastest increase since that happy day, eight years ago almost to the hour when Lehman Brothers padlocked its doors and ended an entire era of what turned out to be largely bogus prosperity.

At that level, core CPI sits right at the average mark of the decade or so which preceded Dick Fuld’s date with destiny, so it is of interest to note that the Federal Funds rate then registered a median level of 4 3/4% as did the yield on the benchmark 10-year Treasury.

Today, we are haggling about what will be the result of raising the Funds rate to a whole three-quarters of one percent and, by extension, what that will mean for a long-term security which currently boasts a yield of just less than one-and-three-quarters.

Trader, investors, and policy-makers were clearly made of sterner stuff, back in the good old days.

Thursday 15th September Another slightly edgy session has been unfolding today with the market continuing to live on its nerves ahead of next week’s Bank of Japan meeting and the crucial Federal Reserve conflab a few days after that.

Symptomatic of this is that, despite slightly softer-than-expected data coming out of the US, bond prices have continued to erode and their yields correspondingly to rise.

For example, the Big Daddy of them all, the US 30-year Treasury bond has shed 5.7% in principal value in the past week – not bad, considering that the thing only earns you 2.5% if you hold onto it for a whole year.

For lower-yielding Bunds, the experience has been even worse but such are the perils of having the central banks reduce what is supposed to be the safe, maiden-aunt side of your portfolio to the status of a thrill-seeking teenager.

Damned if they do and damned if they don’t is now the prospect as, on the one hand, any hint of QE-siness or an attack of the Nervous NIRPies will only intensify the sell-off and quickly spread to equities –  and who know what else besides? –  while, on the other, the harmful side-effects on banks, insurers and especially pension funds are becoming too evident to ignore.

Elsewhere, the unveiling of some pretty dire results by that icon of the British High Street, John Lewis, shows that it has, despite its famous slogan, been decidedly out – if not exactly under – sold in the past few months.

Profits at the partnership were down by almost 15% in the first half of the year, leading Chairman, Sir Charlie Mayfield, to complain of tough conditions and to warn that staffing costs would have to be addressed in the near future. Across the High Street at Next, there was a similar tale of woe, if only a slight drop in profits for the year to date.

More ominously Next CEO Lord Wolfson warned that the company would start to pass through the higher costs associated with the weaker pound next year, even if at the expense of sales volumes.

More money for less stuff? That should be music to the ears of the Bank of England since that is exactly what it and its fellow central banks are striving to achieve as they try to make us all richer by first making us poorer.

The other salient point of the release was that whereas as money spent in Britain’s bricks’n’mortar outlets only rose by around 1.5% in the year to August, that spent online shot up by 18.5%, meaning that the cyberstores accounted for just less than two-thirds of all growth enjoyed over the period.

Jeff Bezos ate my lunch, we might say – – having first had it delivered it to the door by drone, presumably.

Wednesday 14th September With bonds taking a breather from the past few days’ sharp sell-off and with the major stock markets generally showing up green, the cream of the crop of today’s happenings has been news that German chemical giant, Bayer, has finally enticed American agri-concern Monsanto to a harvest festival wedding by offering the bashful bride a sizeable dowry of $66 billion.

Though not the first hefty merger in the sector of late – Dow Chemical and Dupont became a combine just before Christmas, while Syngenta is in the process of being safely gathered in by ChemChina as we speak – it is certainly the largest, setting a record both for a German company and for an all-cash transaction, anywhere.

To seal the union, Bayer says it will pay $128 a share, a premium of around 20% to Monsanto’s closing share price in an act of corporate generosity which will mean it is forking out something of the order of eleven times the book value of its target.

A rough calculation also shows that the combined company will be very highly leveraged and that all the goodwill involved will mean that the lenders of the $47 billion Bayer will eventually require to complete the deal will have absolutely nothing in the way of tangible equity to rely upon as a backstop for their funds if the rains fail in future.

Not that that has given them much pause in a world of negative interest rates and gross central bank interference in capital allocation. All yield is good yield at the moment, remember.

It’s not all ‘Bringing in the Sheaves’, however: those of a superstitious bent can also find a couple of fairly nasty omens in the timing of this barn-busting merger.

Firstly, there’s that fact that the previous record-holder for a German-led takeover was Daimler’s disastrous marriage to Chrysler – one that was in the midst of being sealed in the summer of 1998 when Russia suddenly defaulted and then derivatives powerhouse, Long-term Capital Management, imploded, threatening to spark a much wider, systemic rout in the markets.

Adding to poor auguries, the $60.4 billion paid by InBev for Anheuser-Busch used to hold the laurel for an all-cash deal. That one came about pretty much on the eve of the Lehman collapse, a cataclysm whose consequences still plague us and whose eighth anniversary we are about to celebrate, (if that is the correct word to use in the circumstances).

Anyone care to bet the farm that nothing similar is portended this time? 

Tuesday 13th September Finally, the day has arrived when the members of the Federal Reserve enter their pre-meeting period of ‘Purdah’ when they are no longer supposed to comment on the near-term economic outlook or its implications for monetary policy.

The sound you hear in the background is the collective sigh of relief coming from a market left feverishly playing a multi-trillion dollar game of Simon Says each time a Dove gets up to contradict a Hawk and vice versa.

Making investors even more twitchy, many are beginning to suspect that the whole charade of Quantitative Easing and Negative Interest Rate policy is fast reaching its end-game – – something given extra credence by the recent well-orchestrated series of calls for more government deficit spending to be added to the mix.

As a result, when the bearish Lockhart hinted at a hike at the end of last week only for the Uber-bullish Brainard to poo-pooh the idea on Monday, the inconsistency triggered a jump in long bond yields of 15 basis points in the US and as much as 25bps in a Europe left doubly disappointed by the first signs of self-doubt emanating from Mario Draghi at the ECB’s policy meeting last Thursday.

Given that the high valuations appended to equities are largely an artefact of those same, deliberately suppressed bond yields, it was little wonder that the stock market, too, took fright.

The Dow Jones Industrials, for example, plunged almost 500 points on Friday; then regained no less than 365 of them yesterday after Madame Brainard uttered her emollient words; only to slide another 200-plus in to start the session today

And if you thought this game of swings-and-roundabouts was restricted to financial assets, consider the oil market.

Having rallied almost 25% in the first half of August as credence was being given to the idea of OPEC output being capped, crude finished the month 13% off those same highs as doubts resurfaced.

Cue Russian hints that it might be accommodative, and the first few days of September witnessed another surge of more than 10% only for OPEC to increase its estimate of how much of the black stuff could be pumped by those outside the cartel and the International Energy Agency followed by noting atypically weak demand in the EM powerhouses of India and China.

Enthusiasm thus dampened, the cost of a barrel has again begun to slide…

As former Fed Governor Kevin Warsh said this week of his erstwhile colleagues: having 19 people all ‘screaming’ about the meeting was a great way to induce a policy error.

And as Bill Dunkelberg, chief economist of the US small business body, the NFIB, pointed out, uncertainty  – – especially of the political kind in the is-she, isn’t-she US  – – is the main hindrance to further expansion being felt by his hard-pressed members.

It can hardly be supposed that Mr Warsh’s successors will do anything to lessen the concerns of Mr Dunkelberg’s colleagues any time soon.





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Io, Saturnalia!

Ah, Brexit! What is there left to say that not already been said, most of it either out of folly or falsehood? As regards the overall political backdrop to this lightning bolt of mass discontent, the only thing that is clear is that there is no clarity—neither within Britain nor without. If, as the Good Book tells us, a house divided against itself cannot stand—hard hats on, people! Continue reading

The Case for Brexit

‘Dear True Sinews, what are your thoughts on Brexit? Roger Bootle wrote a piece in the Telegraph yesterday suggesting that just because everyone is saying one thing, it doesn’t necessarily follow they are right Currently, I sit firmly on the fence getting splinters! Neither side is convincing me either way.’

So wrote a friend the other day. What follows is my answer to his question.

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Mehr Europa? Wir sagen, Nein!

Riddle me this, if you will. ‘Europe’ as a concept has perhaps never stood in lower regard, whether in the eyes of its own citizens or of those of us thankfully still beyond its reach. Yet the euro is strengthening – with options showing levels of bullishness not seen since the 2008/9 Crisis – and the likes of Italy and Spain can both borrow for 30 years at much the same rate as can the USA. Ye Gods! It truly must be the Promised Land.

But, forget the fantasy world of central bank-distorted financial markets for a moment and look around at the world beyond the Bloomberg screens.

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The Road to Canossa

That the artificial interest rates in evidence in our hugely distorted capital and money markets can be made negative in nominal as well as in real terms is, alas, the curse of the modern age. Though entirely at odds with natural order – as we have repeatedly tried to make plain – they are also a curse that we are unlikely to have lifted any time soon, especially not in a Europe where there is no effective restraint to be had upon the exercise of his awful powers by the likes of a fanatic like Draghi.

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Avoiding the Issue

In the wake of the so-called ‘Panama Papers’ furore, the push-button issue of the One Percent being found able – OH! THE HORROR! – to shield some of its wealth from the taxman, regardless of the jurisdiction in which its members have chosen to set up shop, has predictably called forth bad economics, dubious legal opinion, and strident political point-scoring in almost equal measure. Continue reading

Hocus Pocus

We are in danger of being blinded by semiotics and so losing sight of substance. We are so convinced that the medium IS the message that we have forgotten to seek for the meaning it is supposed to convey. We have given in to the quack doctors and their unscientific theories of humours in the body economic. We are now so anxious to keep the patient’s temperature minutely regulated that we have neglected to do anything about the malarial parasite which had earlier given him a fever and now has him shivering through a chill.

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