The Economist

As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence:  How could this be happening again so soon?

As virtual fantasy worlds go, Blizzard Entertainment’s Diablo 3 is particularly foreboding. Within this fairly straightforward gaming framework, virtual “gold” is used as currency for purchasing weapons and repairing battle damage. Over time, virtual gold can be used to purchase ever-more resources for confronting ever-more dangerous foes. But in the last few months, various outposts in that world have borne more in common with real world places like Harare, Zimbabwe in 2007 or Berlin in 1923 than with Dante’s Inferno. A culmination of a series of unanticipated circumstances has over the last few weeks produced a new and unforeseen dimension of hellishness within Diablo 3: hyperinflation. Considering the level of planning that goes into designing and maintaining virtual gaming environments, if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing? The Austrian School has long warned of the arrogance and naïveté intrinsic to applying rigid, quantitative measures to the deductive study of human actions and the events of the last week provide a stark reminder of the power and inescapability of the laws of economics.

When is the economic collapse going to happen?  Just open up your eyes and take a look around the globe.  The next wave of the economic collapse may not have reached Wall Street yet, but it is already deeply affecting billions of lives all over the planet.  Much of Europe has already descended into a deep economic depression, very disturbing economic data is coming out of the second and third largest economies on the globe (China and Japan), and in most of the world economic inequality is growing even though 80 percent of the global population already lives on less than $10 a day.  Just because the Dow has been setting brand new all-time records lately does not mean that everything is okay.  Remember, a bubble is always the biggest right before it bursts.  The next major wave of the economic collapse is already sweeping across Europe and Asia and it is going to devastate the United States as well.

China is in the midst of an urban revolution, with hundreds of millions of migrants moving into cities every year.  Since 2011, for the first time in history, more than half of China’s 1.3 billion citizens (690 million people) are living in cities.  Another 300-400 million are expected to be added to China's cities in the next 15-20 years.  New Premier Li Keqiang recently proposed accelerating urbanization in China, and said urbanization is a “huge engine” of China’s future economic growth. Yet, China’s urban dream may be derailed by the lack of affordable housing in cities for the massive influx of urban residents.  

More millionaires live in Tokyo than in any other city, according to a new report from WealthInsight, beating out New York and London. The Economist notes that the city, which boasts 460,700 individuals with net assets of $1m or more (excluding their primary residences), is home to over a fifth of Japan's millionaires. However, when it comes to real money (since who can get by on a mere million dollars worth of wealth these days), London tops the list with 4,224 multi-millionaires. But when it comes to the real BSDs, New York City and Moscow rule the world with 70 and 64 billionaires respectively wondering the streets. As The Economist also notes, should you wish to rub shoulders with the rich, heading to Tokyo, London, New York, or Moscow would be a mistake - it is Frankfurt that has the highest millionaires per capita (with 75 out of every 1000 people having at least a seven figure net worth).

We recently discussed the 'dead-weight' problem of youth unemployment in developed economies. The Economist estimates that the world's population of NEETs (not in employment, education, or training) is a stunning 290 million - or around one-quarter of the world's youth. Sadly, many of the 'employed' young have only informal and intermittent jobs. In rich countries more than a third, on average, are on temporary contracts which make it hard to gain skills. Young people have long had a raw deal in the labour market. Why is this so important? A number of studies have found that people who begin their careers without work are likely to have lower wages and greater odds of future joblessness than those who don’t. A wage penalty of up to 20%, lasting for around 20 years, is common. The scarring seems to worsen fast with the length of joblessness and is handed down to the next generation, too - leading to a vicious cycle that weighs on growth dramatically. With a stunning 71% now expecting to work in their 'retirement' in the US, it would seem the opportunity for the jobs and wealth transfer to the younger generation is being blocked by a generation hamstrung by an increasingly repressive Federal Reserve.

With the Fed and Bank of Japan buying nearly every government and agency security on the planet, even a completely rancid pile of bollocks might look and smell like a lovely red rose... 

It may seem uncharitable to note that only 0.4% - that's 4/10th of 1% - of mutual fund managers outperform a plain-vanilla S&P 500 index fund over 10 years, but that is being generous: by other measures, it's an infinitesimal 1/10th of 1%. So what do we get for investing our capital in mutual funds and hedge funds? The warm and fuzzy feeling that we've contributed the liquidity needed to grease a monumental skimming operation. Ten out of 10,000 is simply signal noise; in effect, nobody beats an index fund. The entire financial management industry is a rentier arrangement: they skim immense profits and return no productive yield at all.

In a slight digression from the usual pure market-based discussions of Jeremy Grantham's perspectives, the fund manager addresses what is potentially and even more critical factor for the markets. As he writes, we are in a race for our lives, as our global economy, reckless in its use of all resources and natural systems, shows many of the indicators of potential failure that brought down so many civilizations before ours. By sheer luck, though, ours has two features that might just save our bacon: declining fertility rates and progress in alternative energy. Our survival might well depend on doing everything we can to encourage their progress. Vested interests, though, defend the status quo effectively and the majority much prefers optimistic propaganda to uncomfortable truth and wishful thinking rather than tough action. It is likely to be a close race.

The crypto-currency Bitcoin is still merely a speck on the global monetary landscape. It is young, experimental, and for all we know, it may ultimately fail to break into the monetary mainstream. However, on a conceptual level some are willing to call it a work of genius and arguably the most exciting development in the field of money for more than 130 years. The outcome is probably binary: Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more. Those who buy Bitcoin as a speculative investment should consider it an option on the future success of the crypto-currency. We still consider gold to be the essential self-defense asset in the ongoing paper money crisis. The brand-new crypto-currency Bitcoin has to first earn its stripes as a monetary asset by proving itself as a ‘common’ medium of exchange. That is why we view Bitcoin very differently from gold, although the attraction of both has its origin in the demise of entirely elastic, politicized state fiat money. In the meantime, the debasement of paper money continues.

Many investors are now buying yield with little regard to the price that they're paying. It's a dangerous game that's not going to end well.

First CNN, then AP, now Reuters: the entire media is increasingly starting to look like amateur hour. Unless, of course, Soros is like Osama, and had several "reincarnated" body doubles, with the original specimen long gone. Here is our suggestion for another prepared article: "Today after XX centuries of monetizing debt, the Emperor of the Galactic Central Bank, Gaius Maximus Printius Bernankius the DCLXVI^th, ended QE in the year of the alien invasion, XXXXX. Bread costs XXXXXXXXXXX."

I asked the question: is Bitcoin money? (It's price sure is rising parabolically like silver in 2011) In brief, I said no it’s an irredeemable currency.  This generated some controversy in the Bitcoin community.  I took it for granted that everyone would agree that money had to be a tangible good, but it turns out that requirement is not obvious.  This prompted me to write further about these concepts.

The 'relative' innocence of the depositors in Cyprus who saw their savings crushed by the hammer-blow of Germany's reality last week is, it seems, not the only hardship that the European people are suffering. In Spain, thanks to their FROB restructuring, shareholders and bondholders (including hundreds of thousands of unsophisticated 'retail' investors who were sold 'fail-safe' and 'high-return' investments) face losses (haircuts) from 96% (equity) to 36% (subordinated debt) and 61% (preference shares) following the 'bailout' of Spain's dodgiest cajas (or savings banks). As The Economist notes, clients infamously included Alzheimer’s sufferers and at least one customer who signed by dipping a finger in ink; shareholders should know the risks but the vast number of Spaniards who bought preference shares and complex subordinated debt from their cajas often did not. While these investor losses pave the way for bank recapitalizations; they confirm the old adage that there is no such thing as a free 'yield' lunch (especially in the new normal ZIRP world in which we live).

The smart money is selling Hong Kong and Singapore property. This implies real estate prices may be topping out, with far-reaching consequences.