A few weeks ago we noted Bundesbank president and ECB governing council member Jens Weidmann's analogy between the Faustian bargain offered by a money-printing Mephistopheles in Goethe's classic prose and today's ubiquitous oh-so-tempting short-term solution to everyone's pain. His full speech (below), while a little dramatic, should indeed strike fear into many with its clarity. The financial power of a central bank is unlimited in principle; it does not have to acquire beforehand the money it lends or uses for payments. Many believe Goethe was portraying the modern economy with its creation of paper money as a continuation of alchemy by other means. While traditional alchemists attempted to turn lead into gold, in the modern economy, paper was made into money. Indeed, the fact that central banks can create money out of thin air, so to speak, is something that many observers are likely to find surprising and strange, perhaps mystical and dreamlike, too – or even nightmarish. Of course, Weidmann concludes, it is important that central bankers, who are in charge of a public good – in this case, stable money – bolster public confidence by explaining their policies. The best protection against temptation in monetary policy is an enlightened and stability-oriented society. [and Gold!]
"Liquidity trap" was a term coined by John Maynard Keynes in the aftermath of the Great Depression. He argued that when yields are low enough, expanding money supply won't stimulate growth because bonds and cash are already near-equivalents when bonds pay (almost) no interest. Some, like Citi's credit strategy team, would say that it is a pretty apt description of the state of play these days. To their minds (and ours), there is very little doubt that central banks have played an absolutely crucial role in propping up asset prices in recent years, Why have markets responded so resolutely when growth hasn't? The answer, we think, is that in their attempts to free markets from the liquidity trap, central banks are ensnaring markets in what we'll call a "liquidity lure". That lure is three pronged... but tail risks are bound to re-appear and from this position, there is no painless escape.
EURUSD meandered for the first few hours this afternoon but as Asia opens EUR (and AUD) weakness, USD strength and risk-off has come to pass. While not earth-shatteringly devastating, S&P 500 futures are trading down 5 points (8 points from opening high this evening) - their lowest in a month - and testing critical support from the Draghi 'believe' speech spike. AUD weakness is especially notable after opening rather strong (swing from a 0.3% gain to a 0.3% loss now against the USD). Treasuries are still waking up (down 1bps).
We know its 'early' and we should not be judging yet another QE-book by its front-running cover; but the following four charts might give all those hopeful that this time its different some pause for thought on the Fed's actions being anything other than by the banks, for the banks, and of the banks. With refi activity's burst fading, retail mortgage rates having not budged, residential delinquencies rising once again, and average 'approved mortgage loan' FICO score at 750, it would seem the Fed could throw another cajillion dollars at the banks and reserves would just inflate further (along with everything we eat, use, and need), leaving the economy muddling through at best.
The percentage of Americans who reside in the lowest income quintile and move up either to the middle quintile or higher has been in decline over the past three decades. This statistic should be alarming as it is indicative of stagnation within an economy that supposedly fosters the entrepreneurial spirit. In a world of scarcity, opportunity for a better life is an ever-present reality. In the marketplace, success is achieved by making others better off. Achievement for the state means trampling on the rights of others. One embodies the elements of peace and cooperation which give way to fostering incalculable opportunities to thrive. The other results in a perpetual state of conflict between those who “pay the taxes” and “those who are the recipients of their proceeds.” The state creates opportunity for latter and decimates it for the former. The only way to set free the innovative minds who build wealth and opportunity is to scale back this exploitive state of affairs.
The fact that the major credit indices have had to resort to 'imaginary credit' in order to generate an actionable market is perhaps the final nail in the coffin of the single-name CDS market in this cycle. An artificially low spread environment, forced their by massive technical flows thanks to central-bankers' financial repression has removed a natural buyer- and seller- from the market - reducing liquidity; and combined with Dodd-Frank and more regulation (higher capital reqs), dealers are also forced to delever risk books (reducing liquidity). But, there is one glaring reason why the single-name CDS market is dying; extremely high correlation. As Barclays notes, in a market where investors’ ears are, more than ever, finely tuned to the statements of politicians and central banks and the tail outcomes for the market, it makes sense for correlation to be high – at this stage, there should be little distinction between individual names – trading the level of systemic risk premia is the focus. And sure enough, index (systemic) volumes is rising as single-name (idiosyncratic risk) trading volumes and exposures are fading fast. So what brings it back?
On a regular basis we are placated by commercials to satisfy our craving to know which bathroom tissue is the most absorbent; debates 'infomercials' assuaging our fears over which vice-presidential candidate has the best dentist; and reality-shows that comfort our 'at least I am not as bad as...' need; there is an inescapable reality occurring right under our propagandized nose (as we noted here). Economic Reason has gathered together the Top 15 'reality' economic documentaries - so turn-on, tune-in, and drop-out of the mainstream for a few hours...
The truth of the matter is that there is no such thing as a free lunch. The phony prosperity of monetary inflation is entirely illusory. You cannot get something for nothing. "So, whenever you see a criticism of austerity as fostering recession, you are reading a Keynesian. He may not call himself a Keynesian, but in this case, he is delusional. Only Keynesianism teaches that reduced national government spending (“austerity”) in a nation whose national government spends 40% of its GDP (Greece) will produce a recession." Keynesian economic pundits advance many fallacious arguments about government spending. Chief among them is the egregious notion that mortgaging your posterity with debt and deficits is somehow “virtuous.”
Abe Gulkowitz, publisher of the periodic chart masterpiece The Punch Line, has released his latest macro economic update full of 17 pages of charts and news blurbs indicating the true state of the economy in an easily digestible format. While it will hardly come as a surprise to most, the prevalent chart direction is one from the top left to the bottom right in practically every macro vertical, despite the now endless monetary intervention attempts by all central developed world central banks.
The corporatization of society requires a population that accepts control by authorities, and so when psychologists and psychiatrists began providing techniques that could control people, the corporatocracy embraced mental health professionals. In psychologist B.F. Skinner’s best-selling book Beyond Freedom and Dignity (1971), he argued that freedom and dignity are illusions that hinder the science of behavior modification, which he claimed could create a better-organized and happier society. Critically, given our current entitlement-heay environment, the finding that in order to get people to behave in a particular way, they must be “needy enough so that rewards reinforce the desired behavior.” should concern us all.
Guest Post: On Currency Swaps And Why Gartman May Be Wrong In Focusing On The Adjusted Monetary BaseSubmitted by Tyler Durden on 10/14/2012 - 12:53
Last week Dennis Gartman, in his homonymous letter said that he was concerned about the fact that the adjusted monetary base has been falling, rather than rising, taking away the bullish case for gold on the topic of “money printing”. One must therefore remind those with this concern that the credit expansion caused by the backstop of the Fed alone is enough to inflate asset prices. This is consistent with the case we made in our last letter, that a commodity based standard is not as relevant as having a 100% reserve requirement. By the same token, if the reserve requirement is below 100%, it is not that relevant to see the expansion of the monetary base! The “printing of money” will eventually come, when EU corporations begin to default and the Fed has to “ensure there is enough US dollar liquidity”. It happened in 1931-33, in spite of the fact that the adjusted monetary base had been contracting since 1929: The US dollar was devalued from approx. $20.65/oz to approx. $34.70oz and gold was confiscated.
23 Miles Of Free Fall - Live Webcast Of Felix Baumgartner's Third World Record Attempt From The Edge Of SpaceSubmitted by Tyler Durden on 10/14/2012 - 09:45
Austrian skydiver Felix Baumgartner's previous two attempts to set a world record in freefalling from an altitude of 23 miles, or from "the edge of space" were aborted in the last minute due to heavy winds. In a few minutes, the daredevil will find out if third time will be the charm for gravity to finally not be denied. Watch the live webcast below and find out in an hour when the process is officially scheduled to begin.
First, last Wednesday, Turkey intercepted a Syrian civilian jet suspected of carrying Russian weapons to Syria, forcing it to land in Turkey. The jet subsequently continued on its trip following stern denials from both Damascus and Moscow, and after Turkey found no evidence of its claim. Then yesterday, Syria promptly retaliated against this overt and unjustified aggression by banning all Turkish aircraft from crossing its airspace. Now, moments ago, Turkey retaliated to an act of retaliation against its own initial provocation, by barring all Syrian flights above its own airspace, and in the process preventing virtually all local airborne traffic from taking place. In other words: more mindless escalation which usually ends in a very unfortunate way.
For all intents and purposes, there have been two US Presidents thus far in the 21st century - George Bush (the younger) and Barack Obama. If we take Mr Bush’s two terms to cover fiscal 2001 to fiscal 2008, the total rise in official Treasury funded debt over that period was $US 4.350 TRILLION. If we take Mr Obama’s first term to cover fiscal 2009 to fiscal 2012, the rise over four years was $US 6.050 TRILLION. Add the two together and you get a grand total of $US 10.4 TRILLION. That’s almost two thirds (65 percent) of the total funded debt of $US 16.066 TRILLION as of September 28, 2012.
A month ago, just before the launch of QEternity, we caught a rare glimpse of what may be the beta test of one of the Fed's latest ploys in "unconventional monetary easing" when bank robbers decided to throw money out of their car in central LA during a police pursuit. Today, a month later, and 4 weeks after Bernanke's latest open-ended monetary easing, incorrectly reference virtually everywhere as QE3 (as Twist has had more flow impact on the market than QE 1 and 2 combined) has proven to be, at least so far, an absolute failure, we learn what perhaps may be an even more "effective" approach to juicing the monetary supply with quite literally brand new, freshly printed Benjamins (the Franklin varietal; the Bernanke will have one or more separator commas). From AP: "Federal authorities are warning merchants to be on the lookout for stolen $100 bills that aren't supposed to go into circulation until next year. The bills were stolen from an airplane that landed in Philadelphia from Dallas Thursday morning. The plane had been transporting money from the Federal Reserve facility in Dallas."