Archive - Jul 27, 2013 - Story

Obama: "...the economy is far stronger now than it was four and a half years ago"

...as long as one ignores the reality of the following chart...

"At all times, ultimate collateral and ultimate money remain crucial reference points in modern financial markets, but the actual instruments are important only in times of crisis when promises to pay are cashed rather than offset with other promises to pay.... Our world is organized as a network of promises to buy in the event that someone else doesn’t buy. The key reason is that in today’s world so many promised payments lie in the distant future, or in another currency. As a consequence, mere guarantee of eventual par payment at maturity doesn’t do much good. On any given day, only a very small fraction of outstanding primary debt is coming due, and in a crisis the need for current cash can easily exceed it. In such a circumstance, the only way to get cash is to sell an asset, or to use the asset as collateral for borrowing."

Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system. A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.

It is nearly impossible to convince people that an economic ending is likely, perhaps inevitable. It is beyond anything they have seen or can imagine. We attribute that to a normalcy bias, an inherent weakness of experiential learners. For many, accepting something that has not occurred during their time on the planet is not possible. The laws of economics and mathematics may shape history but they are not controlled by history. The form of cataclysm and its timing is indeterminable. Political decisions continue to shape both. The madmen who are responsible for the coming disaster continue to behave as if they can manage to avoid it. Violating Einstein’s definition of insanity, they continue to apply the same poison that caused the problem. These fools believe they can manage complexities they do not understand. We are bigger fools for providing them the authority to indulge their hubris and wreak such damage. The political class in America, either via misguided economic policies or a deliberate attempt to hide the true condition of the country, has put us here. They will continue to employ whatever policies they believe will keep things going for a while longer. The tragic ending has been cast. Economics cannot trump mathematics.

Positive demographic cycles have been one of the key components in the strong growth trends for a number of Asian countries. As Morgan Stanley note in their most recent 'China Deleveraging' discussion, the decline in the ratio of the non-working (elderly and children) to working-age (15-64 years) population has coincided with periods of economic boom for various countries in Asia in the past 50 years. But... as Nomura's Richard Koo notes - having experienced the very same unstoppable shift in Japan - "demographics will cease to be a positive for China’s economic growth and start to have a negative impact." Fundamentally, Koo adds, this means "the nation will grow old before it grows rich." Demographics, capital accumulation and productivity are the three most important drivers of potential growth, and these three factors are intertwined to a certain extent. China has already entered its first stage of demographic challenge, with its GDP growth slowing on the back of all three contributors of growth. Given the lessons of Japan and the Asian Tigers, China is set to suffer notably from this demographic drag - and its entirely foreseeable.

Bored with the constant daily speculation about who may be the Fed's next head (short answer: whoever Goldman says), and more interested with the actual liquidity dynamics that the next Chairman (or Bernanke, as his departure is far from certain) will have to deal with? Here is the latest.

The storm that caused chaos across financial markets since May should not dissipate any time soon. As such, we retain a short bias towards China and an outright short in EM currencies. If world trade remains weak and local inflation keeps on gaining momentum, the currencies of several EM countries (ex-China) may remain under pressure. Such weakness may be exacerbated by tightening liquidity.

Nearly a month after the Egyptian military coup (that wasn't a coup according to the US), the celebrations over the democratic overthrow of the Muslim Brotherhood's president Morsi (according to John Kerry) continue with hundreds of protesters killed and injured in the latest overnight violent breakout. The reports are obviously conflicting with the Muslim Brotherhood claiming 120 were killed in violent protests with police near Rabaa Al-Adawiya Mosque, describing events as a "massacre", alternatively the government's Ministry of Health says only 38 dead arrived at hospitals so far. The tragic deaths were a logical outcome of protests which according to the head of Egypt's Central Statistics Bureau General Abu Bahar Jundi, saw as many as 35 million people taking to the streets Friday on both sides of the ideological divide. Egyptian army officials put the number at around 30 million.