Category: Equities

Uncertainty! GASP!

Amid the relative torpor of the US holiday, it might be the moment to wax a little philosophical and ask if you, the listener, have ever noticed that so much of what passes for economic wisdom today involves the persistent overuse of the word ‘uncertainty’? Continue reading

Broken Down

First published as ‘If it’s Broke, Don’t Fix it!’, 12th August, 2011

The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt. Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven…

Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price), thus contains within itself the germ of automatic progression. Overtaxation is not an incident, but rather a principle… The destructive influence that it exercises on the condition of the wage labourer concerns us less however, here, than the forcible expropriation, resulting from it, of peasants, artisans, and in a word, all elements of the lower middle class. On this there are not two opinions, even among the bourgeois economists.

Karl Marx, ‘Das Kapital’, Vol I, Ch 31


In Elgin Groseclose’s magisterial ‘Money and Man’, the following, eerily contemporary quote appears in his chapter on paper money:-

The administration of the finances appears to have practised a subtle and ingenious tactic… [and] by modifications in the monetary unit, attempted to influence economic phenomena. Changes… were made to prepare for the issue of loans or to audit the circulation of the treasury notes, or to regulate exchange, to modify the balance of trade… to effect a redistribution of wealth, to influence the price level of commodities, perhaps to attenuate economic crises and famines…”

So, we are told, wrote Albert Despaux of the practices of the French regime under Louis XIV during the final, disastrous twenty-five years of his reign. Indeed, upon first examining the accounts, after seven decades of chronic warfare and costly ritual, the incoming administration was to discover that matters were even more dire than they had originally been led to believe – even without a helpful Wall St. broker-dealer to help anyone cook the books beforehand.

As the Duc de Noailles – the new chief of the Council of Finance– wrote to the dead king’s chief concubine, in the autumn of 1715:

We have found matters in a more terrible state than can be described; both the king [i.e., the ‘public sector’] and his subjects ruined; nothing paid for several years; confidence entirely gone. Hardly ever has the monarchy been in such a condition, though it has several times been near its ruin.”

Plus ça change, one cannot refrain from remarking.

Though we must factor a larger margin of error into his accounts than we must apply to even our own governments’ dubious estimates, it seems that the sunset of le Roi Soleil was accompanied by an annual expenditure of the order of 236 million livres – of which some 86 million was interest payable on the debt – against which revenues of only some 150 million livres could be found. Total debt amounted to perhaps 3 billion livres, implying an average interest rate just south of 3% which is, ironically, much the same as that enjoyed by Uncle Sam today.

The annual deficit, therefore, amounted to some 43% of revenue, or 30% of outlays – still below the Bernholz accelerating inflation threshold of 66% and 40%, respectively, even if not exactly a testimony of rude fiscal health. Things had been deteriorating for quite some time before this, so that, overall, the grand Bourbon’s debt rose twentyfold in thirty years. By way of comparison, the imperial presidency in Washington has allowed its own count of obligations to climb a not wholly incomparable fifteenfold in a like period of time.

It is of note, then, that the abject financial state to which Louis’ vainglory had reduced his realm compares fairly favourably with that produced by a similar threescore years-and-ten of military welfarism in his successors’ populist republic, where the latest €150bln deficit represents 54% of receipts and 35% of expenditures – and the old satyr‘s performance looks even more attractive beside the newly ex-AAA United States’ tally of 60% and 38%.

Moreover, whereas the currency doctoring of which Despaux so disapproved was the culmination of a 66-year process during which the livre was devalued 40% in terms of gold and 35% in terms of silver (for a mean inflation rate of 0.8%!), that same proportionate loss of gold value has occurred to the livre’s paper descendants in just the last sixteen-eighteen months – much less the last six-seven decades. Moreover, in the same, two-generation period up to the present, the US dollar has lost 98% of its gold and over 99% of its silver value, with the franc putting up an even poorer showing beside it.

Even in CPI terms, the US dollar buys only 8% of what it did in 1945, a 3.8% annualized drop whose overall extent it has taken successive French governments something of the order of fifty years to accomplish at the compounded 4.7% rate prevailing in l’Hexagone.

The consequences of the penury of the early eighteenth-century French state are well known to students of human folly, for these were the all-too familiar circumstances in which the regent, the personally extravagant Duc d’Orleans – eschewing both politically unpalatable alternatives of swingeing austerity or outright default – turned to the twisted, Scots genius of John Law, that patron saint of underconsumptionist currency quacks and the honorary founding-father of latter-day central banking.

The broad thrust of the insanity and wastefulness unleashed by this pecuniary Pandora are perhaps too well known to bear overmuch repetition here, but what should be emphasised is that Law – like Bernanke – at first tried to argue that he was not some crude inflationist, but that he was merely arranging an asset-swap of paper money for mortgages. He also held, like all of his ilk who have succeeded him, that the panacea for a nation groaning under an insupportable burden of debt and famished for a lack of productive capital was the emission of more and more money.

This age old error of confusing the medium of exchange with the object of exchange is one we continue to commit. It as if a man’s thirst can be slaked by giving him a box of drinking straws or his appetite sated by kitting him out with a shopping basket.

Soon, enough, for all his astuteness, the malign side-effects of Law’s scheme made themselves felt, not the least of them, the distress occasioned to the ordinary household by the rising price of necessities in a world simultaneously subject to the blatant vulgarities of the rising mob of instant, speculative ‘millionaires’ (as the new phrase had it). Just as we have learned all over again, such disadvantages came rapidly to overwhelm the largely incidental fillip the inflation accorded to genuine economic activity.

Unabashed, our Caledonian conjuror could only plunge ever further into a maze of bewildering – and often contradictory – expedients of his own construction. In a flurry of on-the-hoof policy-making of the kind so eagerly practiced today, he unavailingly sought to remedy his earlier mistakes by blurring the lines between state debt and public equity, between common stock and bank money; by banning, then re-instating the use of gold and silver and altering their official parities with mind-numbing speed until all trust in his System – its specious virtues so recently extolled to the heavens – collapsed and France lay broken alongside it.

So, too, do we – the voluntary legatees of John Law – face a world which is seemingly broken, in its turn.

Sauve qui peut!

With the PR-man’s trained ear for a catchy phrase, that emptiest of empty suits, UK PM David Cameron declared, in the aftermath of this week’s appalling display of mass barbarism, that society in the unhappy land over which he shakily exercises power was ‘broken’ – to the ill-concealed schadenfreude of much of the continental press, many of whose own cities still bear the scars of similar irruptions of the Noble Savages whom their Provider States have so successfully reared in the moral wasteland of their sprawling favelas and seething bainlieues.

Painted in oscillating shades of red and green on our dealing screens, we can also see the full, epileptic frenzy of our broken financial markets, no longer evidence of the rational allocation of hard-spared capital to the enriching process of patient and diligent entrepreneurship, but a wild, computer-driven video arena where countless billions swarm into and out of the sea of tickers from one micro-second to the next, with each successive ebb and flow of this leveraged flood further reducing the informational content of the associated prices and so defeating the very purpose of the capital market itself.

Many disparate classes of ‘assets’ had spent eight months trading ever more closely bound to one another on the wave of Bernanke’s last, fatuous, Rooseveltian ‘experiment’ of QEII. So it was that the expiry of that nakedly cynical programme, at a time when the underlying macro-data had rather predictably started to turn sour, left a vacuum behind the broken-record promises of the stock promoters. Unfortunately, much like Nature herself, the milling Herd in charge of Other People’s Money – to whose members the projectors exist solely to whisper their blandishments –– absolutely abhors a vacuum.

A long time ago, we first wrote about what we had come to recognise as the bipolar tendency of financial orthodoxy to undergo opposing, Kuhnian revolutions of its Groupthink every six to twelve months, or so.

Typically, the players first persuade themselves of the validity of an often arbitrary, but usually bullish, scenario which, by dint of constant repetition and uncritical mimicry comes not only to serve as a dogma, but one which each believer professes to have discovered for himself. Along the way, all objective data and governmental statistics which can possibly be construed to support this scenario are talked up and re-transmitted in confirmation of the first idea: those which cannot be so re-interpreted are simply ignored as ‘outliers’ by all except the small cluster of much-derided contrarians and habitual Cassandras.

Eventually, as the trend matures and its espousal becomes near universal, it begins to lose its onward momentum. Now, for the first time, the dissonant evidence, which has long been accumulating, begins to excite a certain uneasiness in the Jungian mass consciousness.

Finally, the trend turns – sometimes to, but often absent, the accompaniment of some unanimously-recognised trigger event – and the first losses start to be taken by those latecomers caught in the reversal. As each successively lesser, Greater Fool sells out, cursing himself that he always buys the top, as he does, he encourages another of this time’s Smart(er) Money men to quit while he’s ahead, too. So, each initial trickle dislodges more and more of those clinging precariously to the edges of a now-vertiginous slope below, until the first, trivial setback snowballs its way into a screaming avalanche of head-in-the-hands liquidation.

Now, at this point of maximum dislocation and mental discomfort, all those inconvenient developments which should have long since called the move into question are suddenly rediscovered and – lo! – they crystallise instantly into the foundational themes of a counter-trend of equal and opposite conviction.

Sadly for them, the earlier naysayers will find no belated applause for being right, being despised for their pusillanimous refusal to play the game if they say, ‘I told you so’ and being anyway doomed to seeing their premature insights co-opted shamelessly – and without the slightest attribution – by the post hoc rationalisations of a consensus-hugging crowd soon avidly blowing themselves an anti-bubble to replace the inflated soapskin of ill-starred hope which has just imploded all around them.

So it has been here, too, with the Shock! Horror! Hoocoodanode? of the downwardly-revised US GDP numbers; the farce of the WWE Smackdown which was the Federal budget dispute; and the ritual slaying of the sacred cow of that nation’s

undeserved prime credit rating.

Up until that point even the yawning cracks opening up around the foundations of the Eurozone could largely be ignored in the eagerness to buy a small section of Blue Sky, but, once sufficient self-doubt was ignited in some corner of that Gordian tangle of correlated and cross-margined trade in which the near-free leverage of QE-II had enmeshed everyone, that ongoing turmoil also became one of the defining features of the new bearishness and its expression in market pricing became violently intensified as a result.

So the first sparks of panic were struck to find a ready kindling among the garish paraphernalia of illusion piled high behind the flats and tableaus which comprised the backstage clutter in the Theatre of the Absurd where the ‘Great Global Recovery’ play had been enjoying its unbroken, 15-month run.

In time-honoured fashion, a mad rush for the exits soon followed.

The Wasteland

So, here we stand, exactly eighty years on from the collapse of CreditAnstalt, the run on the Danat bank, and the disastrous abrogation of Britain of sterling’s gold standard status which turned an earlier stock market setback into an enervating slough of Depression.

Here, we stand, almost forty years to the day from Nixon’s abandonment of the dollar’s pivotal membership of the bastardized gold-exchange standard and the horrifying decade of rampant inflation which followed.

And here we stand, a week shy of four years after the Fed’s first, tentative response to the looming CDO/wholesale funding disaster which would threaten to sweep away not just those hocked up to the eyeballs in America’s grotesque sub-prime bubble itself, but feckless borrowers and risk-insensitive lenders – both public and private – right around the globe.

So let us take stock of what exactly we have wrought in the meanwhile by following mainstream economic exhortations to emulate what we think the hallowed FDR may have enacted or the venerable Keynes may have ordained, were these two leading lights of cynical expedience and wilful interventionism each alive today.

With over $2 trillion in excess reserves parked with the Fed, the ECB, and the BoE; with unsecured, interbank loans for anything other than the shortest of terms all but impossible to obtain; with the thirst for security sporadically driving rates on T-bills, general collateral – even deposits – below zero; with the benchmark LIBOR rates increasingly inoperative and their replacement OIS rates barely standardised – with the spread between the two varying widely and with the latter diverging from supposedly stable official base rates which thy are supposed to reflect – it is clear that the money market is broken.

With even short-date basis swaps between the major currencies wandering far, far from their near-zero, normal levels; with countries like Brazil attracting peer group interest for imposing taxes on inflows into and bets on the appreciation of its currency; with the Swiss trying to stem a 7.8 sigma, one-in-300-trillion, two-week move in the currency by aiming to swell sight deposits by 10% of GDP and by showering hapless East European carry-traders with precious francs; with EUR-USD risk reversals at their most extreme ever, both in absolute terms and as a percentage of underlying volatility – what can we say but that the FX market is broken?

With the DAX – for example – undergoing its own, 6.3 sigma, 7-in-a-billion chance, two-week move – one only exceeded in its compressed magnitude during the Crash of ’87; with the peak five days of frantic selling seeing record volume, thanks in part to the less-than-benign influence of the high-frequency trading which hummed along the fibre-optic cabling at triple the normal rate and accounted for up to 75% of overall trades, according to the Nasdaq’s biggest execution broker, it is no wonder the VIX doubled in only four days, a jump only exceeded by last May’s HFT-led ‘flash crash’. No wonder either that several European and Asian authorities saw fit to intervene, either to prop up prices or to outlaw short selling, or both. The only inference to be had – the equity market is broken

With the ECB being forced to take drastic – and arguably illegitimate – action to cap the 3-month, 225bps rise in the Spanish-Bund and the concomitant 270bps rise in the Italy-Bund spread; with US Treasury bonds plunging amid the rout to record low nominal and negative implied real yields, all the way out to 10-years; with record low mortgage rates forcing duration-hungry investors and hedgers to receive long-dated swaps at minus-40bps; with record levels of junk issuance having been conducted at record low yields, before a frozen market saw spreads explode a 5.6sigma, 218bps to stand 50bps wider in just ten days – to cite just a few instances of a widespread disruption – it is fairly evident that the bond market is also broken.

With the ratio between the two main oil benchmarks – WTI and Brent – having crashed from its well-behaved, long-term, pre-crisis ratio of 1.07:1 +/-0.2, to hit 0.79:1; with gold trading to a 5% premium to platinum for only the second time in at least the past quarter-century; with base metals showing less and less correlation between price, curve shape, and visible inventory as funding games and warehouse manipulations distort trading patterns; with industrial commodities being driven more by CB inflationary-‘Risk On’ considerations than by the specifics of usage and production – perhaps we must admit that the commodity market is broken, too.

With the widespread frustration of the masses spilling out onto the streets of the Maghreb, Egypt, the Levant, the Gulf, Spain, Greece, Eastern Africa, Bangladesh, Chile, and others; with even the mighty Chinese Communist Party quailing before the popular wrath excited by the divisive symbolism of the high-speed rail crash; with 80% of surveyed US voters saying the country is ‘heading down the wrong track’; with the widespread unease in Germany at the executive’s dismissal of the citizens’ understandable reluctance to bankroll the wider EU; with the emerging realisation that three generations of an ever-encroaching, ‘tutelary deity’ welfarism have not only sapped the vitality out of the economic organism, but have bred out all vestige of responsibility and self-restraint from the teeming, unweanable mass of perennial dole-puppies it has whelped – it is therefore undeniable that politics-as-usual is broken, too.

With the glaring failure to predict even the possibility – much less the circumstance – of the recent Crash and with the even more foreseeable failure of its tired old, rehashed nostrums of ending the slump by means of an inequitable programme of corporate welfare, inflationary ‘unorthodoxy’, and the unleashing of the debt-spewing monster of the state to gorge itself upon such things as individuals and private concerns no longer care to consume, it should hardly be controversial to assert that mainstream macroeconomics – and the reputations of the many panderers to power who practice it – are equally broken.

Breaking the mould

Whatever our individual pre-occupations with the specifics of this collapse, we must bear in mind that, amid all the wreckage, there are countless millions of hard–pressed souls, each trying to earn an honest living by first identifying and then satisfying the needs of their fellow men in the best, most cost–effective manner they can accomplish. In the attempt to do so, the overwhelming majority of these strivers cannot fail to provide a living to others, too – whether by employing their labour directly in their own factories and offices, or indirectly, by buying in the goods and services these latter work to supply at the workbenches and computer docks of other hirers of their effort.

In their constant struggle to peer into an uncertain future so as to estimate whether anyone will buy their output and, if so, at what price; and then to decide what they can afford to pay in turn for the necessary means to meet this potential market, they cannot in any way be assisted by the ramifications of all the multiple breakages outlined above.

If they cannot trust the signals being sent to them about the cost of inputs or the acceptable charge for outputs; if they cannot assume a certain stability in the rent and availability of working capital, or rely on the calculus of securing longer term funding; if they and everyone with whom they deal are being subject to wild swings in currency rates and commodity prices; if there is no clarity about the framework of regulation, the structure of legislation, or the outlook for taxation – but only a well-founded pessimism that none of these are likely to change for the better; if they begin to see themselves as the targets both of material expropriation and Pharisaic condemnation – are they then likely to give full reign to their innate spirit of enterprise, to fully express their characteristic get-up-and-go and, by so doing, give the rest of us a greater opportunity to sell our wares in the marketplace for skill and sweat?

Hardly and therein lies the rub. For if we are to pull ourselves out of the quagmire into which we have stumbled, it will be to little purpose to take three short, backward steps before hurling ourselves deeper into the morass, not just with renewed energy, but while carrying the growing weight of mud which clings to our clothes as the result of each previous failed attempt.

Debt cannot be the cure for over indebtedness, nor a more rapidly debased currency the antidote to its ongoing debasement. We must forgo the intellectual conceit that we can impose some higher order on the seeming chaos of the world and instead we must simply smooth the way so that its own emergent properties can seek out a better constellation of interconnections, all by itself.

We must recognise that there are no workable macroeconomic solutions which can be laid down: that everything is a matter of functioning microeconomics building things up; that the diamond takes on its lustrous geometry, atom by atom; that the masterpiece hanging in the Louvre came into being brushstroke by painstaking brushstroke.

Only get the microeconomics right and all else will follow.

Make labour once more affordable and its terms no longer an indentured servitude for the employer. Ensure that entrepreneurship is no more risky than it has to be and that it reaps the full fruits of its success – as well as seeing that it bears the full responsibility for its failure – by clarifying law, minimising red tape, and, once this is achieved, by resisting the bureaucratic urge to tinker any further. Set prices free to perform their function, insist that markets are able to clear, and see to it that titles to property are both secure and simple to transfer.

Under such conditions, we will each help to build a lasting recovery for the other, one job and one company at a time, much more certain of our success – however much patience will be required in its achievement – than if we were to heed the thundering decree of some sweeping, Collectivist Five-Year Plan emanating from the mouths of the tin gods who frequent the Platonic centres of world power.

Financial markets may be broken, politics and mainstream economics may be broken, but, fortunately the economy of men is a robust, highly redundant network, furnished with its own immune system and self-repair mechanism, consisting of unhampered entrepreneurial search and action.

As Adam Smith famously remarked, ‘there’s a lot of ruin in a country’ – though, contrary to what our present rulers seem to believe, he was not issuing a challenge to them to seek to quantify its limits.

If we are to avoid that final ruin, if we are to properly rectify much of what is broken and not merely smother it in an inflationary balm and patch it over with a plaster of false accounting for a further, brief, electoral half-life, there are three things which we could and should usefully add to the list of the downcast and destroyed.

These are, namely: that unsound money which is truly the root of all evil; the unfunded mountains of government debt with which such bad money engages in a poisonous symbiosis of executive tyranny and political corruption; the duty-free but rights-encrusted, all-pervading Provider State which waxes fat on that unholy alliance of illusory finance and which not only robs Peter piecemeal to pay Paul, but empowers Pericles to oversee the theft, and so suffuses the commonwealth with a miasma of perverse incentives, ethical degeneracy, and irreconcilable conflicts of interest.

What lies broken, we can surely fix, but only if we break in turn the habits of mind and the tyranny of the man-made institutions which we first allowed to break the things we value – our freedom of association, our independence of action, and our individual chance of prosperity.

Hurricane Cassandra

First published 8th August, 2008

When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Citigroup CEO Chuck Prince, FT Interview, July 2007


How things have changed in the short space of a month.

For, right up to the second half of July, world equity markets were still raging ahead in utter denial of the spreading cracks in the credit boom, with both the S&P and the emerging markets indices making new highs in that time .

This was despite the fact that all the technicals were signalling the need for caution – elevated sentiment readings; record high margin longs on the NYSE; record low mutual fund liquid asset percentage holdings; a turn in the breadth of the market (that for the Nasdaq has, indeed, since hit multi-year new lows); volatility indices climbing with – rather than against – the rise in stocks.

More crucially, there was still an attempt to downplay the magnitude of the problems finally coming to boil in what has arguably been the most spectacular mass hysteria in the whole sorry history of financial market manias – the multi-trillion Ponzi scheme of credit we have created since the collapse of the Technology frenzy.

We have long told anyone arguing that commodities have occasionally displayed bubble-like behaviour that they were no more susceptible to this kind of infection than any of a number of other asset classes – both conventional and ‘alternative’ – and that this was unlikely to pass until the we had removed the cause of all this mischief, namely, the credit bubble which had continuously been inflating prices everywhere you looked (though, ironically, everywhere the central banks were choosing not to look, at the same time).

The real bubble, we maintained, was in credit: all others – whether in lead futures, LBO targets, Patek Philippe watches, or Modernist daubings – were ancillary to what the woefully uncomprehending ex-Fed Chairman once called a ‘conundrum’, but which was, in reality, all too understandable a phenomenon.

In saying this, we would be assailed on the one side by starry-eyed mining promoters (many of whom had increasingly only come across a ‘mine’ in the reference section of the Harvard library) who would insist on telling us that our caution was misplaced; that we ‘didn’t get it’ because we didn’t understand China’s influence on the supply:demand dynamics of the metals concerned (sic!).

On the other hand, we have been haughtily dismissed by institutional investors who could very well scoff that, say, nickel might be overstretched in the near term, but who were still perfectly content to buy yet another gallimaufry of dubious, rag-tag credits from their over-eager investment bank account managers, each secure in the belief that the hocus-pocus which purported to value these baskets afforded him a wide margin of safety.

As the events of the past few weeks have begun to reveal, however, this last presumption has proved just as fatal as all of its many less-than-illustrious predecessors in the perpetration of mathematical hubris.

Indeed, it is a compelling testimony to our capacity for pseudo-rational self-delusion that so many could still cling to the idea that something as intensely self-reinforcing as the financial markets – institutions in which those highly non-linear and inherently unquantifiable actors known as ‘human beings’ are at play (and largely with Other People’s Money, at that) – can ever yield to the same statistical calculus as a laboratory vessel full of inanimate gas particles.

Without delving into the wide chasm between ‘risk’ (a realm where models can be made to work) and ‘uncertainty’ (one where they decidedly can not), without drawing upon the insights of Austrian epistemology, without citing Nicholas Taleb’s famous metaphor of the ‘Black Swans’, did no-one stop to think that if their model was supposed to be so hot, then so, in all likelihood, was everyone else’s?

Had they done so, they would have realised that not only must buying assumptions have become claustrophobically crowded (i.e. very efficiently irrational!), but that – far worse in its implications – once the market turned, all these blessed computers would be revealed to be disastrously mispriced in one horrible unison.

After all, if everyone was running much the same CDO-analytical version of Deep Blue, did no one ever ask themselves whether they were really enough Gary Kasparov’s out there on whom to unload the junk once the models all began to flash, “Sell!”, at the same time?

Obviously not. And yet, even now there is a current of denial still insidiously at work in the minds of people who don’t wish to acknowledge that their own deeds, as members of the undiscerning Herd, have given rise to what they insist on misconstruing as just one more ‘six sigma event’.

Apart from “the problem is fully contained” school of hopeless little Dutch boys and the usual crowd of “buy the dips (preferably from me)” chancers, the air is filled with the dreary strains of that eternal Chorus intoning “the economic fundamentals are sound”, even as all manner of high-falutin’ investment schemes implode around us.

Have you ever remarked upon the strange fact that when asset prices are rising, their ascent is the inescapable consequence of a solid ‘fundamental’ underpinning – no matter how unrealistic have become the valuations of the assets the pundit himself is touting. The market is, after all, a ‘discounting mechanism’, don’t you know?

Now, contrast this with the reaction once that same market suffers one of its periodic bouts of vertigo. Far from being an unbiased reflection of disembodied knowledge, the reversal can now only be ascribed to an access of the vapours on the part of a few ill-informed neurotics!

What is more, this asymmetrical mental ratchet effect (in part, the sort of ‘model arrogance’ discussed above; in part, wishful thinking; in part, cynical salesmanship) misses the fact that just as financial market conditions exert a clear and undeniable influence on the real economy in the upswing (we do mostly direct our efforts toward the prospect of monetary gain, remember), they can hardly fail to do so in the downleg as well.

To those who would here interject that this is all irrelevant because ‘”for every loser there is a winner”, we would point out another glaring asymmetry – not that which exists between sellers and buyers, so much as that between assets and liabilities in our highly-interconnected world.

To aver that the gains made by the man who sold a since-fallen stock at the top constitute a zero sum with the losses of the man to whom he sold is a statement which only holds at an immediate and individual level: at the systemic one, the truth is never so reassuringly self-correcting.

For a start, our self-congratulatory high-seller will probably have plunged straight back into the market and bought some other claim on Dame Fortune with his gains. Being still exposed, therefore, he may well see his notional profit eroded as his new holdings are, in turn, pulled lower – perhaps as a direct consequence of his original counterparty’s distress.

More importantly, the top of the market for this particular asset was unlikely to have been reached thanks to a calm shifting of a greater proportion of a finite pool of money preferentially from its alternative outlets: alternatives which therefore had to cheapen both relatively and absolutely and whose countervailing decline must, accordingly, have exerted a genuine, intrinsic mechanism of restraint on the game.

Instead, the system in which we must operate is inherently unstable, like the moisture-laden, summer air over the warm tropical ocean.

Only let a share, or a group of bonds, or a new-fangled class of derivative instruments puff up, lazily, into the view of speculators and their avid lenders and, before you can say “the ghost of John Law”, the hot winds of credit are filling it and driving it higher and higher into the troposphere – an ascent which not only induces more and stronger currents of air to lift it yet further, but which catches all other asset classes willy-nilly along with it in its swelling updraught.

In this regard, what we have lived through, these past few years, is nothing less than the genesis of a Category Five, super-cyclone – one whose terrifying eyewall is a screaming vortex of collateral-debt-derivative feedback.

Once such a storm breaks, our asset-liability bind will be seen to be the critical weakness, the Mississippi levee whose failure could well swamp us all.

Granted, it is the case that every debit has somewhere a corresponding credit, but this also means that everyman’s fate is intimately bound up with that of his neighbour.

As Fritz Machlup pointed out in the 1930s, if A lends to B who lends to C, who in turn lends to A, it is indeed the case that – at the aggregate level – everything seems to match up, but this does not mean that it also cancels out. If C encounters difficulties and informs B he is broke, B will default on A and A will then be unable to meet C’s call for the cash with which he hopes to disembarrass himself. All will be ruined together.

Therefore, even if we personally have not been knowingly playing the ragged edges of the credit game, the fact that the mighty hurricane which looms above us made its first landfall in the sprawling, plasterboard suburbs of sub-prime is no reason for complacency for, as is just beginning to be glimpsed, sub-prime is itself no more than a particularly indefensible subset of the far more widespread dangers we all now face.

No, the world is not going to go into a tailspin because of the travails of fifty-odd thousand poor fools whose painful desire to make a fast buck flipping condos met a none-too-choosy lender with similarly short-sighted motives.

The plain fact is, however, that Hurricane Cassandra (so named because no one would heed the many warnings given, instead of carrying on frenetically dancing the Chuck Prince Charleston) never limited herself to such a low-rent corner of the world.

Rather, the whole colourful motley of hedge fund gunslingers, private equity barons, bond insurers, CDO traders and fixed-income investors – the whole, out-of-control business of M&A, of vast share buybacks, and hence of main market equity outperformance, as well as emerging market re-rating – the whole self-aggrandizing swagger of the Bulge Bracket bonus bonanza – all of it – every last red cent of it – has been, in turn, cause and effect of the build-up of the storm system which now threatens to sweep this Big Easy of false prosperity away, leaving little but the matchwood of shattered dreams and disabused expectations in its wake.

If all of the foregoing doesn’t strike a cautionary enough note to give you pause, Dear Reader, when you hear the Siren whispers telling you to dive back in now that things are ‘cheap’, there is one last sobering question to contemplate.

In our Austrian vision of the world, the business cycle IS the credit cycle. Overeasy credit encourages too much investment in too many false projects. Financiers become reckless and entrepreneurs are mislead en masse to see real opportunity where there is only the shimmering mirage given off by hot money.

What is more, the cycle tends to manifest itself in a lengthening of the productive structure, in undertaking investments increasingly removed from the immediate provision of consumer goods, and especially of consumer staples. Another crushing asymmetry comes to bear here, as a result.

This lies in the fact that it is far easier to lengthen the structure – to use easy money and expensive shares to build plant, lay pipelines, and fill the factory with banks of gleaming, new, highly-specialized machinery – than it ever is to shorten it again – retooling the assembly line for a different use, bringing a different ore out of the mineshaft, even breaking the equipment profitably up for scrap – when the premises on which these bold steps were taken prove to be mere falsehoods spun amid the prevailing mood of financial incontinence.

If, therefore, the credit cycle really has turned here – and this is surely the best candidate for marking that decisive change of phase we have had for some years – we cannot fail to reckon with serious, real world implications as the squeeze progresses, as returns on investment falter, as orders are cancelled and jobs begin to be lost.

Accordingly, as we try to extricate ourselves under from the falling masonry of financial foolhardiness, what we must be asking ourselves is which company (or, indeed, which resource) has received the greatest short term boost from the recent asset inflation and has therefore become the most over-extended and vulnerable to its subsequent evaporation.

Conversely, we must also try to identify those who have been conservative enough, or who will hence react sufficiently rapidly (or for which resource we will still find the matching of physical supply to genuine, end demand a considerable challenge) and who or what will therefore best weather the onrushing tempest, offering real, long term value, no matter how beaten down the traded price becomes in the interim.

Answers on a postcard please, but we suggest you draw the lesson from sub-prime and start by looking for the corporate equivalents of those who took out – as well as those who looked like geniuses for extending – larger and larger chunks of ‘NINJA’ loans (‘No Income, No Job or Assets’), even as the ship was visibly heading for the rocks.

If you do, you’re sure to find more than enough candidates to keep you out of mischief for some good while to come.

The Beggar’s Opera

The Beggar’s Opera

First published 2nd February 2009

“Today, with the exception of a dozen or two reasonable individuals, the whole world is in complete agreement on two points: debts should remain unpaid, and the economy should be stimulated through strong inflation.”

Mises to Fritz Georg Steiner, letter dated January 29, 1932, Mises Archive 71: 11.             


A good deal of our writing over the past year and a half has concentrated on analysing the course the downturn would take, once it emerged; how deep it might become; and how widespread would be the pain felt as the latest of all too many New Era runaway trains crashed headlong into the unchanging economic realities it had long sought to deny.

Naturally, our attempts at prognostication were necessarily less than perfect. The emerging market currency crisis of the latter months of 2008 escaped us, to name one big miss, as we committed the cardinal sin of failing to disaggregate the data pertaining to dollar-based assets and liabilities in Asia, Russia, and Brazil and so spoiled the fact that we had come early to the conclusion that the ‘decoupling’ thesis was sheer economic charlatanry by failing to consider how an external liquidity crunch would exacerbate the collapse of exports in a whole slew of foreign exchange-rich – and, hence, theoretically not funding-constrained – countries.

Nor, of course, were we able to directly specify the timing, nor the exact sequence of events as the calamity unfolded. While being among the most committed and consistent sceptics of the merits of government activism, even we could not have suspected that Hank’n’Ben, surely the greatest paired buffoons since Abbot and Costello, would – through sheer, vacillatory incompetence – contrive to undo the supposedly salutary effect of all the hundreds of billions of dollars they obtained under false pretences – or which they simply printed up – in order to shower them without overmuch in the way of either solid legal sanction or well-tested precedent on their best Wall St. buddies.

Neither could we have imagined that, within the space of a few short months, these two clowns would eradicate all grounds for rational calculation by counterparties, claimants, and would-be purchasers by:-

  • first shoehorning Bear Stearns and WaMu into JPM and Merrill into BoA (bemoaning all the while that institutions grown even more gargantuan as a result were already ‘too big to fail’);
  • then violently switching tack to proffer establishment poster-boys such as GS and Morgan Stanley the shelter of the Fed’s ever-spreading comfort blanket of liquidity;
  • next brutally throwing fellow investment bank Lehman to the wolves  – pour encourager les autres;
  • even as they near-simultaneously issued a blank cheque of unprecedented scale to that mission creep-blighted un-insurer, AIG?

Apart from greatly increasing counterparty risk, this also threatened to trigger CDS-related cash-payouts on an incalculable scale. In turn, this forced the Big 3 central banks not only to slash rates and to monetize all sorts of highly unsuitable assets, but to offer foreign currency swaps to the tune of $650 billion and, further, to allow banks to build up a veritable mountain of superfluous re-deposits with them of no less than $1.3 trillion – undermining what was left of the interbank lending market as they did.

Hence, we have moved swiftly from a problem of localized stress in the automotive and residential real estate markets to a general constriction of even the most basic of trade flows as working capital has evaporated, leading to a classic ‘struggle for liquidity’ (albeit one partly masked in terms of its effect on, say, the yield curve, by the extraordinary actions being undertaken by the central banks in their role as cartel welfarists).

Toccata and Fugue

Though much of our approach has involved a direct application of our teachers’ traditional precepts, any extra skill we may have displayed in relation to the unthinking Herd, has also arisen from today’s adapting the analysis to take account of the peculiar political, institutional, and social framework in which unchanging economic laws may express themselves in greatly varying specific outcomes.

To take an example of the general case, Mises wrote perhaps THE classic exposition of what has broadly befallen us in his Meisterwerk, Human Action, Chapter XX –  a piece of writing so percipient that it merits an extended quotation:-

‘Deflation and credit restriction never played a noticeable role in economic history. The outstanding examples were provided by Great Britain’s return, both after the wartime inflation of the Napoleonic wars and after that of the first World War, to the prewar gold parity of the sterling. In each case Parliament and Cabinet adopted the deflationist policy without having weighed the pros and cons of the two methods open for a return to the gold standard. In the second decade of the nineteenth century they could be exonerated, as at that time monetary theory had not yet clarified the problems involved. More than a hundred years later it was simply a display of inexcusable ignorance of economics as well as of monetary history.

‘Ignorance manifests itself also in the confusion of deflation and contraction and of the process of readjustment into which every expansionist boom must lead. It depends on the institutional structure of the credit system which created the boom whether or not the crisis brings about a restriction in the amount of fiduciary media. Such a restriction may occur when the crisis results in the bankruptcy of banks granting circulation credit and the falling off is not counterpoised by a corresponding expansion on the part of the remaining banks. But it is not necessarily an attendant phenomenon of the depression; it is beyond doubt that it has not appeared in the last eighty years in Europe and that the extent to which it occurred in the United States under the Federal Reserve Act of 1913 has been grossly exaggerated.

‘The dearth of credit which marks the crisis is caused not by contraction, but by the abstention from further credit expansion. It hurts all enterprises–not only those which are doomed at any rate, but no less those whose business is sound and could flourish if appropriate credit were available. As the outstanding debts are not paid back, the banks lack the means to grant credits even to the most solid firms. The crisis becomes general and forces all branches of business and all firms to restrict the scope of their activities. But there is no means of avoiding these secondary consequences of the preceding boom.

‘As soon as the depression appears, there is a general lament over deflation and people clamour for a continuation of the expansionist policy. Now, it is true that even with no restrictions in the supply of money proper and fiduciary media available, the depression brings about a cash-induced tendency toward an increase in the purchasing power of the monetary unit. Every firm is intent upon increasing its cash holdings, and these endeavours affect the ratio between the supply of money (in the broader sense) and the demand for money (in the broader sense) for cash holding. This may be properly called deflation.’

As he went on to explain:-

‘But it is a serious blunder to believe that the fall in commodity prices is caused by this striving after greater cash holding. The causation is the other way around. Prices of the factors of production–both material and human–have reached an excessive height in the boom period. They must come down before business can become profitable again. The entrepreneurs enlarge their cash holding because they abstain from buying goods and hiring workers as long as the structure of prices and wages is not adjusted to the real state of the market data. Thus any attempt of the government or the labour unions to prevent or to delay this adjustment merely prolongs the stagnation.

‘…Under a credit expansion which first affects the loan market… the inflationary effects are multiplied by the consequences of capital malinvestment and overconsumption. Overbidding one another in the struggle for a greater share in the limited supply of capital goods and labour, the entrepreneurs push prices to a height at which they can remain only as long as the credit expansion goes on at an accelerated pace. A sharp drop in the prices of all commodities and services is unavoidable as soon as the further inflow of additional fiduciary media stops.

‘While the boom is in progress, there prevails a general tendency to buy as much as one can buy because a further rise in prices is anticipated. In the depression, on the other hand, people abstain from buying because they expect that prices will continue to drop. The recovery and the return to “normalcy” can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more. Therefore the only means to shorten the period of bad business is to avoid any attempts to delay or to check the fall in prices and wage rates.

‘Only when the recovery begins to take shape does the change in the money relation, as effected by the increase in the quantity of fiduciary media, begin to manifest itself in the structure of prices.’

Variations on a Theme

But the time for unalloyed diagnosis is past: what we must now attempt is the much trickier task of prognosis. In attempting this, the questions we, as commodity investors, must try to face up to are threefold; just when the recovery will ‘begin to take shape’, what sort of ‘shape’ that might be, and broadly how will the ‘structure of prices’ be ‘manifest’ when it does.

Here, having cited Mises as an authority on how the archetypal business cycle breakdown comes about we must briefly digress to consider a number of key differences between today’s economy and the one he was analysing in the first half of last century.

The first of these lies in the fact that the malign effects of credit expansion used to be largely the result of giving exclusively producers greater means with which to purchase inputs (whether relatively long-lived machinery, stocks of semi-processed goods, or labour itself) beyond the levels which could be funded out of their own profits and at interest rates below those at which they could attract into their schemes other sources of genuine savings.

By definition, we take these latter to mean those money sums which represent a voluntary abstinence from exhaustive consumption. The twin significance of this is that not only do these savings’ very genesis demonstrate that a limited satiety has arisen with respect to current output (and hence that something new on the menu might be welcomed from entrepreneurs in future), but also that a tangible pool of unutilized goods must now exist; goods which can therefore be reallocated from a marginally over-supplied end-consumption to serve as inputs (direct or otherwise) in the newly re-organized or expanded productive processes for which the businessman is seeking the funds in the first place.

The principal virtue of insisting upon such a correspondence is that it greatly limits the scope for the development of the sort of systemic entrepreneurial error which so plagues us today, a phenomenon which can only arise under conditions of unbacked credit expansion (so-called ‘forced saving’), and the frustration of true market mechanisms (which categorically do NOT include state-sponsored fractional-reserve banking or the maintenance of ‘managed’ currencies either within, or across, borders).

That such a blight pertains today, should by now be undeniable, but, overlaid upon this, trillions of dollars of additional credit has also been made available to serve no obvious productive end, but merely as a means of providing instant gratification on dangerously stretched and under-discounted payment terms to end-consumers (private or public) who were either unable to afford it out of current income, or by issuing claims against the earning assets already in their possession.

For far too long, the games has been to push all reckoning off up an ever-mounting hill of sand, all the time trying to pretend the present value of each grain of obligation is a reasonable one. Alas! Once the force of economic gravity at last won out over the illusions of investment bank ingenuity, it triggered a power-law avalanche, burying one of the millions of easy-terms Sisyphuses under the weight of a burden each thought he should never again have to shoulder.

It is true that some of this credit had a counterpart in a real desire to save, but such a transfer of resources to exhaustive- (rather than to constructive-) users has largely vitiated the savers’ benign impulse to make provision for their future. Moreover, two contemporary elements have served further to reinforce this baneful financing of unproductive (and hence, in essence, destructive) consumption – the two phenomena tritely labelled ‘globalisation’ and ‘securitization’, respectively.

By the former we mean the fact of separating the functions of an increasingly feckless, home-bred cadre of the takers of instant material pleasures from those of a well-motivated (if often only semi-skilled) overseas workforce of the makers such delights – an unfortunate apartheid often reinforced by a one-sided policy of currency (mis)management on the part of the latter’s government and by abject irresponsibility on the part of the formers’ overlords (herein lies another difference with the classical tale of the business cycle, though not necessarily with the experience of the intra-war years themselves)

Like much in economics, we must be careful not to drown the individual in the anonymous swamp of the mass, for we may all – at one time or another – find ourselves on either side of the divides which fall between borrower and lender, producer and consumer (a split which we must therefore be careful not to moralize about too monotonously).

However, as individuals, there are certain obvious boundaries over which we would not overstep unless these were hidden from us by means of either financial manipulation or political intervention. Sadly, few such limits have been in evidence in a world in which rampant inflationism has been encouraged, in great measure, by central banks desperate to forestall the consequences of a series of preceding busts and oblivious to the fact that a modest rise in their favoured index of consumer goods prices is far from being the sole litmus test of economic well-being.

Compounding this, those charged with directing the emergent nations have been all too happy to build the Potemkin village of pseudo-prosperity out of the straw of unrealizable promises to pay being liberally issued by richer foreigners with far too few material goods, but only a plethora of suspect IOUs, to offer in exchange for the poorer citizens’ sweat. The foreigners’ suzerains, for their part, were even more willing to close their eyes as thrift disappeared and investment withered under the twin pestilences of chronic credit expansion and a creeping government encroachment on free association. Instead, they were content to fool themselves that a Never-Never land profusion of flat-screen TVs and dockside dining establishments – largely charged to plastic or parlayed out of an ephemeral gain in home values – had somehow offset the latent impoverishment and progressive demoralisation which was insidiously eroding their societies’ long-held competitive advantage.

This is not to suggest – as both the right-wing autarkists and the left-green Savonarolas are equally wont to do – that a greater international division of labour is bad, per se. Far from it: the whole history of human civilisation is one of a greater specialization of function and of the evolution of higher levels of mutual co-operation which it instils. Not only are these the conditions for more rapid material progress, but they also tend to be conducive to the maintenance of peaceful relations, too, given that such fruitful interdependence means the dubious benefits of war become more and more paltry in prospect when compared to the ongoing bounties of commercial interaction which must perforce be sacrificed upon the bloody altar of Mars.

What IS needed, however, is to adhere faithfully to a monetary-financial system which promotes such an impetus, rather than prostitutes it. To abandon the semi-automatic regulation of a proper gold standard and the self-correcting tendencies of the price-specie mechanism it transmits for a world of chicanery in which central banks routinely aim to force interest rates to artificially low levels and finance ministries seek to defend unrealistic currency parities vis-à-vis their trading partners is no less heinous a method of false accounting than is the sophisticated sham of the bankers’ ‘Level 3’ assets or the crude deceit of a Madoff.

The crux of the second named influence is that not only does securitization break down the bounds of mutual responsibility and prudence between counterparties; not only does it encourage the sorcerer’s apprentices to introduce a dangerous degree of over-ingenuity into the associated repackaging, but that it inherently mirrors the psychology of the indulgent borrower by providing the lender with his own form of après moi le déluge instant gratification. This is realised when the originator books – and promptly re-leverages – a notional profit long years ahead of the receipt of what he has, in fact, ensured is an ever more protracted stream of smaller and smaller quanta of payments, each predicated upon an ever more dubious ability to generate the necessary cash when it falls due.

Moreover, when our securitizer then lends the purchase price to those to whom he sells the resulting security (and sometimes even capitalizes the fees due from this as part of another securitization), we can see that a great deal of undesirable leverage can become obfuscated by the layers of seductively lucrative pyramiding being piled on top of what is, at root, a very basic – if often a highly suspect – transaction.

Institutionally, this has been made worse by the fact that finance has become the master, not the servant of the economy, a reversal which has seen star-struck politicians compete away their powers of oversight in this explicitly non-market area, in order to have the greatest number of free-spending financiers come settle in their own particular fiefdom.

The result has been that of allowing the bankers to determine their own risk limits with the same disastrously predictable consequences of enjoining teenage hot-rodders only to ease off the gas pedal once they, themselves, felt they were driving a little too fast for comfort.

Battle Hymn of the Republic

To return to our larger theme, the second major disparity between conditions today and those which obtained when the traditional business cycle theory was being teased out is that, in the interim, even the peace-time state has gone from inflicting the incidental annoyances of a worthy, but over-officious nightwatchman to marshalling a swelling roster of Gauleiter and commissars, each charged with implementing a Petri-dish profusion of bureaucratic and penal Do’s and Don’t’s in every nook and cranny of the citizen’s life. It is therefore able to commandeer scarce resources to a degree unheard in more self-reliant times.

To take but one measure of this, in the America of 1929, private sector income – wages, proprietors’ earnings, dividends and interest – was reckoned at more than twelve times the size of the public sector wages and welfare payments being doled out. Even at the height of the New Deal (and hence at the depths of the Depression) this ratio stood at five to one. In stark contrast, in today’s much-touted ‘free market’, the proportion has lately languished – even amid 2006’s  boom-time conditions – at around 3:1, below that recorded even in the final years of WWII.

If we stop for a moment to make an additional adjustment for all those ostensibly ‘private’ businesses whose sole or major client is the state (and whose totals should therefore be transferred from numerator to denominator), we can see that what has lately fallen apart is anything but Darwinian ‘capitalism’ and that it is not so much the red staining the tooth and claw of the marketeer about which we should be concerned, but rather the one staining the banner of the International which flutters above us all.

The point here is that if government is a dead weight in good times – especially with regard to the enormous costs incurred as its legions of pen-pushers, inspectors, and collectors earn a nice living, thank you, making up arbitrary rules and shuffling resources from Peter (who is not THAT electorally important to their masters) to Paul (who currently happens to be) – it can be equally a decelerant in the bad ones. Even here, though, we should harbour no illusions about whether this attribute simply prolongs the patient’ s agony, rather than being of any identifiable therapeutic value to him.

There is no magic at work here, only a suspension of accounting conventions. Any sprawling organisation able to siphon off the wealth of others by diktat can endure even the most sizable mismatches between income and outgo for a considerable time, especially when the Maynard-in-Wonderland orthodoxy positively encourages it to abandon any pretence of living within its means (effectively, within those of the subjects from whom it levies them) whenever storm clouds gather in the vicinity.

With the cargo-cult of Keynesian ‘spending’ dominating the collective consciousness, Depression may be the sickness of the citizen, but it is assuredly the health of the State no less than is War (to recall Randolph Bourne’s trenchant phrase). Thus, the enormous, bloated girth of Leviathan is bound to expand relatively – and probably in an outright fashion, as well. As it does, GDP – which is biased to the sort of end-expenditure at which government excels and which largely ignores questions of the sustainability of such flows – can be temporarily boosted and payrolls kept artificially inflated, even if the ongoing loss of wealth is increasing.

Given the socio-political tenor of our times it is pointless to pretend that one can make many converts to the viewpoint that what the economy needs now is not more meddling, but instead the greatest entrepreneurial flexibility in adapting to drastically altered conditions; the maximum facility in matching costs to falling revenues; and the utmost capacity in altering the composition of its capital base.

Conversely, in the purely dispassionate attempt to formulate an investment strategy it would be equally naïve not to allow for the fact that, well-intentioned or not, the perverse incentives attaching to interventionism (which, sui generis, must involve a policy of not allowing many of the necessary adjustments to proceed) and to the general substitution of narrow political preference for the market-based expression of individual will may well cushion some of the most violent effects of the down wave, but only at the cost of seriously impairing both the speed and quality of the subsequent recovery.

Remember that, for all the unheard-of billions thrown at the problem, for all the monetary debasement so cynically practiced, even Roosevelt’s most ardent apologists will tend to subscribe to the misconception that it took the forcible enslavement of six million young men in the armed forces and the institution of a rigid command economy to ‘put and end to’ the downturn.

Effectively, this is to admit that only by a tyrannical diversion of the labour of a significant portion of the workforce to the least constructive ends imaginable could a Keynesian programme keep everybody occupied – albeit for the scantest of material rewards to those so made to toil! No surprise then, that many of FDR’s Brain Trust openly admired Mussolini, or that JMK himself notoriously prefaced the German edition of his General Theory with a wistful encomium to the totalitarian system under which he imagined the machinations laid out therein best working. 

Be that as it may, it is clear we must resign ourselves to a repeat of the experiment, for each passing day brings us yet more activism – much of it sweatily reactive; little of it showing signs of reflection or the pursuit of a considered strategy; most of it adding to uncertainty and thus spreading paralysis rather than acting as a palliative.

But if it is a military maxim never to reinforce failure, it is equal a principle of politics that if one billion fails, then two billions must be required, or, indeed tow hundred billions. Switching metaphors, the quacks into whose tender mercies we have been committed consider that, if the patient has become anaemic and run-down as a result of long years of dissipation, he must be bled and, should he not recover from his swoon, he must be purged and bled some more.

Pomp & Circumstance

Of course, it just m-i-g-h-t be that something in the seemingly endless barrage of new measures accidentally delivers one of those ‘Yes, we can’ moments for which all President Obama’s many worshippers are so fervently praying, but there are also three far less benign outcomes which we would argue lie much higher up the list of likelihoods, namely:-

  • that what remains of the market mechanism will wither and die as the incalculability of the regime changes saps its last vestige of vitality and so allows the slump to intensify disastrously;
  • that the advance of government, far from being an auxiliary source of strength, simply provides a cover for the private sector to withdraw from the fray, clamping down on its own expenditures and snuffing out the embers of investment as its members retreat from a world in which they can foresee no realistic chance of turning a profit – something Mises himself was already talking about as early as 1931;
  • that the crazed moves to slash interest rates, to monetize an increasingly unlikely basket of shaky claims, and to balloon public deficits might yet trigger a series of currency collapses or unleash a wild Weimar, wheelbarrow ride to the poor house.

The first of these scenarios needs only a little exposition. Perhaps the most pressing danger in this regard is that an unstoppable death spiral emerges from the current fiasco over the banking bail-out, especially in countries where the relevant scale of contingent fiscal support is clearly beyond the bounds of possible delivery.

Promptly liquidating bad banks, like liquidating any other failed enterprise, would have served to reduce the horrendous degree of over-capacity all too apparent in an business where ever more insane levels of risk and leverage – as well as ever more sly regulatory prevarication – have had to be accepted in order to make the expected return on capital.

But rather than encouraging full and early disclosure of each entity’s true status and then applying a rigorous practice of triage – thereby making room for the remaining healthy banks to continue to serve sound borrowers at an economic rate of interest – the authorities have so contrived it that almost the entire industry has now come to be dependent upon the public purse and/or the central bank printing press, with regulators also conniving in a relaxation of reporting standards and capital adequacy testing at precisely the moment when the cancer of distrust – of discredit, if you will – is poisoning the system, to the detriment of all. The only purpose this seems to be serving is that of keeping the plague victims alive for just long enough to pass the infection on to the healthy.

Be that as it may, we are now almost irreparably committed to the very opposite course – thanks to the incomprehension of some leaders and to the vainglory of others. In this context, we had previously argued that in major countries with relatively little foreign currency debt, the constraints on the monetization of assets, on central-commercial bank support for even long- term government debt, and therefore on unbalancing the budget were perhaps further away than was generally imagined. However, on reflection, that might have been a little too glib and it occurs to us that there are two main caveats to be borne in mind – one general and one more specific.

In the round, the mistake we made regarding EMs last quarter tells us to be wary of over-aggregation here, too. One could well expect that the sharp drop in a given currency which such extreme measures tend to provoke (viz., the UK) might initially be welcomed as an aid in ‘rebalancing’ activity away from the external sector, but, even where overall foreign currency debt levels suggest the side effects should be muted, we must always be wary that certain sectors – or even individual bellwether companies – might, nonetheless, find themselves driven onto the rocks, dragging down their counterparties with them as they founder (Russia is a case in point here).

Even were this not to occur, one cannot entirely allay the nagging suspicion that a sharp fall in the reserve currency, for one, might actually be broadly deflationary, as was sterling’s abandonment of gold in 1931. Though this might seem a perverse judgement to those conditioned to see a sickly greenback as the world’s main inflationary driver, just imagine what would happen to world trade flows, to real income, and to foreign balance sheets – packed as they are with paper denominated in it – if the dollar were suddenly devalued 50% overnight and so prompted widespread write-downs and bought fewer imports (and also, in such credit-straitened times, gave others the means to buy fewer US exports, too).

Turning to the more specific problem we can envisage, the rub is that for such extraordinary steps to be taken, the central bank must be a full and active participant in them – in the jargon, the demarcation between fiscal and monetary policy must be removed. This, however, may be easier to achieve in, say, Japan, the US, or China than it is ever likely to be the case in the Eurozone.

If even Germany has struggled to get its paper away in recent auctions, what price a Greece or a Portugal if bond spreads widen and CDS quotations climb further? To deal with the inevitable fiscal strain of a deep recession is one thing, but to have to resuscitate the entire financial circulatory system at the same time is a prospect which is already beginning to spook the horses.

It is true that the same government bonds with which a polity may intend to support an ailing bank – or use to extend finance directly to a cash-strapped local business – are the ideal balance sheet fodder for that same bank (being zero risk-weighted, earning assets), a fact which sets up the possibility of pulling off a neat little round-robin of accounting trickery.

As we have long said, in extremis, the state could become the lender and spender of first resort, with credit institutions relegated to becoming rump depositories of the proceeds of what would effectively be ‘war-bonds’. Moreover, since these bonds would also be eligible collateral for the ECB, even in the Zone, the central bank could be inveigled into playing a supporting role without formally having to announce its willingness to do so.

Nonetheless, there is clearly much more scope inside the fractious EU for political schism – especially across the historic divider of the Rhine – than exists within, other more homogeneous sovereignties and those who argue that the case of a Spain is no different to that of a California clearly forget that the last time American states signalled their wish to exercise their constitutional right to secede in the face of unsupportable economic policies, a certain high-tariff, corporate-welfarist from Illinois ‘unleashed the fateful lightning of His terrible swift sword’, leaving a million of his compatriots to share his own, premature obsequies.

Beyond the purely financial angle, a further possible route to the abyss which might lead from the adoption of unlimited fiscal support for too many zombies would be constructed amid a resurgence of antagonistic protectionism. The worry here is that as each state acts to prop up more and more of its ailing domestic industries, it will be tempted to try to secure them a market share of which their own efforts have been all too undeserving. Furthermore, State A is likely to become even more bellicose about its new ward’s foreign (non-voting) competitors if it can persuade itself that they are only able to pose a threat to its protégé because their home State B is supporting them in their turn.

An outright repeat of the Smoot-Hawley debacle is probably not to be looked for, but a creeping erection of barriers to trade (whether or not dressed up in the cant of ‘ethical’ or ‘ecological’ rhetoric) – and hence a curtailment of the means by which the indebted can pay down their obligations – is not to be lightly dismissed. Worryingly, both the backlash against immigrant workers seen in Europe, the ‘national champion’ policy emanating from the Elysée and the insidious moves by the US steel lobby to tie Washington hand-outs to preferential use of its products show how rapidly things could degenerate as stresses mount.

The Farewell Symphony

Assuming we do avoid such pitfalls, we must next consider whether government can actually stimulate business or merely substitute for it and the lesson of 1930s America is salutary in this regard.

For example, real, private net domestic investment was negative throughout all of the six years from 1930 to 1935, inclusive, strongly suggestive of the inference that the very business-to-business component of spending which is largely cancelled out in the GDP methodology, but which is crucial to the maintenance – much less the elevation of – material prosperity, was withering on the vine.

With overall retained earnings negative for these same six years – as even non-financial companies sought to maintain some level of dividend payment in the face of a plunge into negative aggregate profitability unique in the statistical record, renewed investment – and hence a re-employment of displaced workers – was all the more reliant on access to funding (and, conversely, to the willingness to take the accompanying risk). A look at the trajectory of aggregate debt levels is therefore instructive here, as the following table highlights.

16-11-09-debt

TABLE 1: ‘Crowding out’ 1930s-style

From this, it is evident that, by 1938/9, though FDR’s regime had increased its indebtedness to no less than 2 ½ times the levels which had prevailed on the eve of the slump in 1929/30, the private sector total provided more than an offset, by contracting 23% from a much larger starting base.

Thus, while government debt outstanding rose some $27 billion (equivalent to a third of average nominal GNP over the period), private balance sheets shed nearly $38 billion, led by a $16 billion drop in corporate liabilities, a $12 billion decline in commercial & financial loans (only partly a result of the $2.3 billion fall in brokers’ loans), and a $7 billion fall in non-farm mortgages. Not shown here, net new issuance of corporate securities declined more than 90% from a 1928-9 combined peak of $13.3 billion to a 1939/40 nadir of only $1.2 billion.

That the net shrinkage in the combined debt stock of $10.5 billion almost exactly matched the $9.5 billion decline in GNP, or the $11 billion drop in disposable personal income is almost too perfect a coincidence, but nevertheless shows up a very real causative chain.

This ‘passing of the baton’ was a major reason why, despite the appearance – after years of Coolidge frugality – budget deficits of exceeding a then-shocking 5% of GDP, a 40% devaluation of the currency, and a tangled lunacy of producer subsidy and supply destruction, ‘only’ took the average change in CPI to the abnormally high peace-time level of 3.4% between 1933 and 1937, but did not entirely realise the contemporary fears of those who fretted over the ramifications of this concerted display of voodoo economics.

Japan of the 1990s offered a repeat version of the trend. From taking up 80% of household savings around the bubble peak (i.e., in the five years 1987-91), private, non-financial corporations switched dramatically to being net lenders of funds, adding to the pool a sum almost three times that set aside by householders. Put another way, from borrowing 9.2% of total private domestic demand, they ended up saving 7.2%, thereby largely offsetting the vast expansion of the government’s contribution.

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Figure 1: Leaving the field of play

Indeed, so counter-productive was this latter, that it was only after the Koizumi reforms started to reduce its footprint – from around 2002 – that private sector demand showed any signs of revival. Shortly, thereafter, in 2003, gross corporate expenditures finally pulled out of a six-year, 14% nominal-yen slump (where they had hit a level first seen way back in 1990) and embarked upon their most rapid and sustained advance since the bubble itself burst, more than a decade before.

So, today – where left to themselves – many businesses have already begun to taking tough, but rational, steps aimed at coping with a radically changed environment. Such an adaptation is, after all, what constitutes the recession itself and this, it should never be forgotten, is a healing process.

Certainly, for some while, fewer capital goods will be needed (or, at least, fewer of last year’s hot-ticket items), fewer workers will be hired, and fewer productive inputs – such as fuel and other raw materials – will find a use. Though one can have a sincere degree of compassion for those individuals blamelessly caught up in the dislocation which must ensue, the shortest route back to gainful employment for them all is for entrepreneurs to be given every encouragement to do what they do best and to be provided with all possible means to identify new opportunities and to suffer no let or hindrance in taking advantage of the temporary slack in resources as they move to exploit them and so act to restore a more durable form of prosperity.

If governments r-e-a-l-l-y wanted to do some good, therefore, they would desist from monetary quackery and strictly limit assistance to that which temporarily alleviates genuine hardship. They would drastically reduce business taxes – as well as those levied on all forms of private savings. They would simplify planning protocols and cut loose the onerous burden of largely pointless regulations being mindful of the fact that building a better framework within which the state-dependent legal nonsense of fractional reserve banking is one thing, but telling entrepreneurs how many threads per inch must be on each screw they use or insisting upon written confirmation of the maximum capacity of each fire bucket is quite another.

Above all, governments should desist from spending much beyond their now-reduced incomes. Though anathema to the tenets of modern macroeconomics (the same ones, you will recall, which were of such help in both predicting and, hence, avoiding our present woes, much less in helping rectify them), this would both reduce business costs directly – hence helping restore profitability – and make the least charge on the sorely-depleted pool of useful existing resources. Such minimalism would therefore greatly facilitate the entrepreneurial shift we so urgently need to take place.

Capriccio Espagnol

But, to re-iterate, it is a forlorn hope to look for an outbreak of collective sanity to occur, so we have to assume that frictions will be increased, not alleviated and that recovery – in the main scenario, at least – will be shallower and more enfeebled than it need be.

In essence, those residing in the inveterate deficit nations (see the accompanying graphic) need to borrow and spend less and save and produce more of almost everything but domestic real estate! If necessary, some reflection of this could be seen in altered foreign exchange rates – ideally as a one-off movement recognising the falsity of the existing parity and its distortive effects on economic calculation – but only where this is not frittered away by renewed credit expansion and the sort of self-defeating short-termism reported by the Bank of England agents last month when they revealed that UK exporters had tried to use the fall in sterling to try to increase prices, only to wonder why orders were not then sufficiently forthcoming in a world already cutting back on outlays of all kinds.

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Figure 2: Neither a borrower, nor a lender be

In the language of Boehm-Bawerk, such nations need to lengthen their structure of production – something not best achieved by mindlessly promoting end-consumption, whatever the Krugmans and Kaletskys of this world may think. As Hayek replied to R. F. Kahn’s disbelieving question on the occasion of delivering his seminal ‘Prices and Production’’ lectures at the LSE, in 1931, if everyone went out and bought a new overcoat (i.e., if excessive end-consumer demand were stimulated), it would make the problems worse, not better for enfeebled higher-order businesses by bidding inputs away from them.

As far back as John Stuart Mill, it was recognised that the demand for end-consumer goods does not constitute a demand for labour, per se – only a vote as to how labour should be employed. It is the pairing of the saver and the productive redeployer of the saved resources which puts others to work, not the hedonistic depleter of the existing stock of goods. But even such a simple, two-step analysis eluded the mathematical meddler who was Keynes, however, leading him down some ludicrous blind alleys, indeed.

As Mises recalled (quoted in Marxism Unmasked, San Francisco, 1952)

“An American friend published an article dealing with his personal friendship with Lord Keynes. He tells a story about visiting Keynes in a Washington hotel. In washing his hands, the friend was very careful not to soil more than a single towel. Keynes then crumpled all of the towels and said in that way he was making more jobs for American chambermaids. From this point of view, the best way to increase employment would be to destroy as much as possible. I would have thought that idea had been demolished once and for all by Frédéric Bastiat in his broken window story. But evidently Keynes didn’t understand this tale of Bastiat’s.” 

Nor do all too many commentators today, one would add.

Conversely, the chronic surplus nations have to ward off the curse of what has seemed like their own success. They need to curtail investment in more export capacity and, in future, those that have resisted it should allow their currencies to appreciate gradually, limiting the possibilities for a future over-reliance to emerge. Rather than acquiring ever more claims against those abroad who are unlikely ever to repay them in full, they would be well advised to eat a little more of their own cooking than has lately been their practice.

In some cases – loosely, that of Allemanic Europe – the expansion has been much more horizontal (an extra car assembly line, an extra shift at the turbine casting works), rather than longitudinal (whole new layers of long-duration, deferred-amortization, interlinked productive stages) and the response should therefore simply be to reduce that capacity which has only served to deliver goods to those inveterate over-borrowers no longer in a position to take them up.

As many commentators have noted, one inevitable and rather unpalatable consequence of the present mess is the striking disparity between the situation in the Teutonic core of Europe and that found in the Latino-Celtic fringe – one which must be faced – assuming the European project itself is not jeopardised without the panacea of a currency adjustment to help bridge the gap in productivity and the cost base.

Self- evidently, Spain, Greece, and their peers need to hunker down and live far more within their means, while Germany and the Netherlands must, in turn, generate far more of their wealth internally than has been their practice, or else they must seek out counterparts able to pay for their shipments machine tools and mining equipment with useful merchandise of their own, not kited cheques.

Patently, the days are long past when it might have seemed sensible to squander such a high proportion of savings in offering ‘vendor finance’ to foreign customers – for that has only been to swap hard-won real resources and human toil for the pixilated promises of a prodigal. Note that this is not to endorse the standard ‘rebalancing’ argument that the surplus nations should simply resolve to spend more, willy-nilly, as an offset for the deficit nations’ retrenchment, for the former, too, have significant losses to make good while the partial re-orientation of their mighty engine of exports will take a great deal of savings-backed capital to accomplish.

In some of the surplus nation a further difficulty arises since here the mountain of export receipts has been used to further swell the domestic monetary base, enabling the ensuing credit influx to foster a true, producer-style boom – China, India, Russia, the Gulf nations, spring to mind. These countries need to shorten their productive structures as well. The irony here is that though individually laudable for their industry and thrift, people in the surplus nations face the much more difficult task in coming to terms with the new order (especially where they were foolish enough to borrow short in foreign currency in order to finance long-term schemes at home). This is something perhaps not still entirely understood by the mainstream

It may be unpleasant to forego the luxuries to which one has become accustomed until one has worked to earn the means to afford them – as the debtors may now have to do – but is usually a great deal harder to accept that the towering superstructure of machinery and plant one has built with the sweat of one’s brow to provide them now needs to be idled, retooled, or scrapped completely. The temptation must surely be to muddle along, high grading mines, skipping maintenance and deferring replacement schedules in factories, seeking for funding (where accessible) to tide oneself over, all in the hope that conditions may one day improve as mysteriously as they seem (to the average business executive) to have deteriorated.

Unfortunately, that is only a choice which serves to increase the consumption of capital and which will thereby add to the impoverishment one is currently seeking to avoid. There is no denying the harsh truth that the overcapacity which has been so painfully revealed these past few quarters is nothing less than a colossal physical reflection of the wastefulness engendered by the worldwide credit expansion. Whether or not those who commissioned the building of the excess were any more than passive participants in a monetary laxity often generated elsewhere and insidiously transmitted to their shores is utterly beside the point: capital has been misguidedly lavished upon it and workers hired to man it. Sadly, the implosion of the boom has left both unable to generate sufficient revenues to justify their continued engagement on anything like the scale envisaged when illusion still reigned supreme.

In the Hall of the Mountain King

We have often remarked that much of what has passed for the exceptional levels of profitability enjoyed by many companies in the upswing was as much as facet of financial engineering (again, much of it associated with securitizing customer receivables, lease payments, etc.) as it was anything to do with improved technique. (It is also salutary to note that, according to the US FoF data, no less than three-fifths of the whole $6.3 trillion, 63% rise in non-financial corporate net worth recorded during the five year upswing, 2003-08, can be attributed to notional gains in the value of real estate holdings, while the remainder can be ascribed to an increase in the balance sheet total of ‘miscellaneous’ financial assets).

Ultimately, aggregate nominal profits in a given country can only improve if a greater proportion or revenues do not have a corresponding cost item immediately to offset them and this can come about only because there has been: (a) more saving-based investment (thoroughly commendable); (b) higher overseas demand (fine, subject to all the qualifications voiced above); (c) or through credit expansion – this latter, of course, the root of all evil.

If any confirmation were needed that this indeed played a very large role in the last cycle, consider what  Richard Dobbs, et al, of McKinsey wrote in March 2008:-

‘Gauged either by earnings as a share of GDP or by returns on equity, US companies apparently fared better than they ever had, at least during the 45 years of our data. Between 2004 and 2007, the earnings of S&P 500 companies as a proportion of GDP expanded to around 6 percent, compared with a long-run average of around 3 percent, with the increase most acute in the financial and energy sectors. At the heart of this widely enjoyed earnings growth was a sales-driven expansion of net income rather than improved overall operating margins, growth in investments, or invested capital, each of which grew only slightly. In effect, companies increased their capital efficiency by selling more without making proportionate investments. In the nonfinancial sector, this meant squeezing greater capital efficiency from plants and working capital, so that returns on capital employed rose some 40 percent above the long-run US trend. Credit-driven consumer expenditures provided much of this revenue boost.’ [Our emphasis]

If we accept that, here among the rubble of the Western banking model, those days are long gone, this has significant consequences for both the top line and the bottom line (not to mention for the balance sheet) as many those same consumers fail to meet their past obligations, much less opt to expand them so incautiously in future.

It adds weight to our view that the last business cycle was one supercharged by easy credit – arguably on a scale never seen before. The inescapable inference is that the Bubble was not so much in real estate, or emerging market stocks, or modern art daubings, or vintage Bordeaux, or hedge funds, or crude oil – or whatever you care to name – these were all symptoms, not causes. No, the Bubble was the whole warped continuum of a monetary-financial system primed for disaster and propelled there by the utter incomprehension of what they had wrought which was so evident among its principal architects and overseers (the men, you will note, who are now charged with the task of ‘mopping up’ in its calamitous aftermath).

Absent such a bubble, even once the long, weary work of recovery is underway, we should set aside all thoughts of seeing such growth rates again for a very long while to come. That is, unless the third and final scenario comes to pass.

This, of course, is the one in which the opening of the Pandora’s Box of fiscal radicalism and monetary overkill lets fly the demons of currency debasement and floods the world – as is the central bankers’ unconcealed desire – with so much cash that people’s main concern becomes no longer how they can get hold of it, but how they can disembarrass themselves of the stuff.

Given that the finances of the populist Provider State are to be tested to levels not seen in peacetime, and given that the explosion in central bank balance sheets are likewise extra-ordinary – not least for the amount of sheer junk contained therein – the world has definitely taken the Tiger by the Tail. Absent the necessary degree of retrenchment and redeployment of resources, it seems the economy will become progressively more sickly and ever more politicised and will be prone to swoon every time the fiscal or monetary valves are opened less than fully, or every time a neighbour devalues his currency faster than one does one’s own.

Already, there are rumblings in Europe about the effects of sterling’s plunge, while the Swiss National Bank, no less, has brazenly warned that, if it deems the circumstances require, it could ‘sell an unlimited amount of Swiss francs…in order to prevent an appreciation…or even to bring about a substantial devaluation of the national currency.’ While the Singaporeans are trying, for the moment, to slow the rate of decline of their currency, the Russians are happy to oversee a rapid one of theirs. For their part, the Japanese are said to be concerned about he appreciation of the Yen, while the nominee for the position of US Treasury Secretary has been telling Congress that it is ‘important’ that America’s trading partners have ‘flexible currencies’ – transparent code for ‘we want a lower dollar’.

In such a world, it will be hard to imagine that the same central bankers who could not normalize interest rates in Japan for thirteen long years after pushing them below 1%, and who took far too long to restore a modicum of sanity in the aftermath of the Tech bust (itself a legacy of the Asian Contagion, which stemmed from efforts to mitigate the Tequila Crisis, which had its roots in the Japanese Bubble, which came about because of the S&L crisis, and the Occidental property bust which arose from the ’87 Crash, which came about thanks to the LDC debt crisis, which could trace its lineage back to the oil shock and hence to the break up of Bretton Woods…) will act pre-emptively and aggressively to withdraw the stimulus once the worst is past.

If that great student of the Depression, Chairman Bernanke has already apologized publicly on behalf of the 1929 Fed for easing too late, do we really think he will risk repeating the mistake they are deemed to have made when they tightened prematurely in 1937?  Does it not disconcert you, just a little, to hear Secretary Timothy Geithner telling the WSJ that: “…There (will be) a huge temptation to see the light at the end of the tunnel before it’s really there and therefore to kind of shift back to restraint before you have recovery fully established…”?

Nor can we really envisage the politicians willingly surrendering a degree of influence, vote-grubbing, and patronage which had successively eluded close to three decades’ worth of their predecessors in office. A speedy return to small(er) government and budgetary continence once the worst is past? Forget it!

So, one cannot fail to reckon without a third scenario – the one we have long espoused (though not without a few doubts in recent months as the bungling has continued). This is that – as Charles Goodhart notoriously put it in 2005 – ‘Deflation in a fiat money system is a self-imposed injury’. The only point is that, at some point, the people who use the money have also to come to believe it is the case and to switch to fearing that the cure may soon become worse than the disease.

Nor should we worry about there being enough ‘willing borrowers’ to effect the necessary bursting of the levees. If, for example, the government cut taxes to zero, while maintaining or even increasing its disbursements and simply issued T-bills to the central bank to make up the difference, a spendable, lendable surfeit of money would quickly find its way into people’s pockets, even absent a functioning private credit system. Likewise, if the central bank offered to swap unlimited quantities of bank notes or reserve balances for any identifiable claim to property, or against any verifiable promise of deferred payment presented to it, a shortage of currency would not long be felt to be a constraint.

Long-term private investment might well find little comfort under such conditions, so wealth creation might be moot, but a feverish struggle to exchange money for such goods as are available might mislead the monetary cranks into thinking they have succeeded in restoring some vitality to the system.

Given the intemperance with which those in power are acting, given the pride which they – closet Jacobins, to a man –  take in being wildly ‘unconventional’ in all things, a rebound from falling to sharply rising prices is eminently possible. The larger the government deficits incurred along the way, the more engrained the  habits of economic dictatorship, and the more entrenched the fiefdoms so created, the greater the overhang of outstanding debt which will result and hence the more intense the incentives to monetize it away in real terms.

Bamboozled by our Bloomberg screens and quickened in our impatience in a world of iPhones and Instant Messaging, we should not lose sight of the fact that we are still at a relatively early stage in the game – it is only eight short months, after all, since the ECB was last raising rates, while even the BoE only started cutting aggressively in September. Do not rule out the possibility that we are already putting in place the means for a destruction of wealth and values in a wholly opposite manner to the one everyone presently fears.

Figure 4: Heat Death, Snowball Earth & the Little Ice Age

Givers of the Law

Pride of place for political news outside the US 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. Continue reading

Abenomics: one arrow short of a quiver

The craziness that is Abenomics seems to have one flimsy foundation: viz., that Japan’s fiscal situation seems so dire as not to be susceptible of a rational approach. Not that this is any real excuse for the political cowardice which attempts to disguise the problem through gross financial and monetary manipulation.

Please click the link for a thorough analysis:- 16-09-29-mmm-sep-jpn

Just how overvalued ARE US equities?

In this complimentary extract from last month’s edition of ‘Money, Macro & Markets‘, that’s the issue at which I take a detailed look. Please follow the link to access the PDF:-

16-09-29-mmm-sep-useqty

Buybacks & Bye-Byes

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%. Please see below the fold for the rest of Monday’s edition of ‘Two-Minute Markets’ or listen HERE on SoundCloud Continue reading

Historical Norms? Really, Janet?

In the Q&A which followed the latest Federal Reserve exercise in ostrich imitation, Janet Yellen offered up this giant hostage to fortune, if only in the spirit of she-would-say-that-wouldn’t-she:

‘Overall, I would say that the threats to financial stability I would characterize, at this point, as moderate. In general, I would not say that asset valuations are out of line with historical norms.’

Patently, if she has somehow arrived at the determination that there is no indeterminably constituted asset bubble in operation, then it figures that non-bubble asset prices cannot be out of line with their norms. Chalk one up to answering one’s own question in the affirmative.

But how much truth is there in this claim? Not very much at all as you will discover if you click on the following link to read this extract of the latest monthly ‘Money, Macro & Markets‘:

MMM Sept 2016 Pt III

 

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!

LISTEN HERE VIA SOUNDCLOUD

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.

Phew!

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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