Central Banks

"With disinflationary global conditions and sluggish pay growth, most advanced economies are likely to remain locked into low-flation, and we expect headline and core inflation rates will continue to run below target and below central bank forecasts next year. Against this backdrop, we expect further near-term easing from the PBOC, RBA, BOJ and ECB and forecast only very gradual and delayed tightening by the Fed (starting around March 2016) and BoE (starting around end- 2016)."

The uncertainties are awkward, but we’re all trapped in a gigantic mess not of our own making. As Voltaire is believed to have said, doubt may be uncomfortable, but certainty is absurd. Almost as absurd as believing that a tiny group of unelected bankers can read the runes of the global economy and manage the price of money accordingly.

In its attempt to evade the shackles of conventional fixed and variable costs, Rio Tinto has decided to begin eliminating humans from its "workforce" altogether. According to the Chinese state media, Rio Tinto has started using automated, driverless trucks to move iron ore in its Pilbara mines, controlled from an operations center 1,200 kilometers away in Perth. 

News That Matters

"The only way to get velocity to pick up in a benign way is to write off the debt by a meaningful amount. That would have helped in the 2008 global financial crisis if more losses had been imposed on creditors.  But that obviously did not happen in 2008 as the policymakers demonstrated that they did not believe in capitalism. Otherwise, the only other way velocity picks up is by an unhealthy hyperinflationary surge reflecting a loss of confidence in central banks, an outcome that becomes more plausible the more extreme the resort to quantitative easing."

The entire global financial system is leveraged to the 'Modern Portfolio Theory' concept that stocks and bonds are always anti-correlated. It is impossible to estimate how many trillions of dollars are managed according to the simple 60/40 mantras but let us just assume something north of $1.4 trillion and something south of "more money than God."  However, the truth about the long-term (132-year) historical relationship between stocks and bonds is scary.  The last three decades of extraordinary anti-correlation has been an era of falling rates, globalization, accommodative monetary policy, and very low volatility of CPI. With the global economy now at the zero bound, those days are over.

The one-month-ish Treasury Bills that mature November 18th are collapsing. Following comments this morning by Treasury Secretary Jack Lew that the US will run out of cash on November 3rd and his warning of a "terrible" debt limit accident, the 11/18/15 T-Bills have seen yields explode from -1bp to 7bps - an unprecedented 8bps spike as investors panic-sell beyond the deadline. WI 1month bills are over 11bps! As Barclays Joseph Abate warns, "This is the beginning...Nervousness is ratcheting higher”

This is why the system is heading for another, far larger crisis than 2008.

It is more evident than ever that the world economy is heading into a deflationary conflagration, but today’s generation of house trained bulls wouldn’t recognize a warning if it slapped them upside their horns. They refused once again last week to exit the casino because they got another signal from Hilsenramp that the Fed is on “hold” until at least next March. Call it Ostrich Economics. But do it quick. Those side-effects are coming to the casino some day real soon.

The key overnight event was the much anticipated, goalseeked and completely fabricated Chinese economic data dump, which was both good and bad depending on who was asked: bad, in that at 6.9% it was below the government's 7.0% target and the lowest since Q1 2009, and thus hinting at "more stimulus" especially since industrial production (5.7%, Exp. 6.0%) and fixed spending also both missed; it was good because it beat expectations of 6.8% by the smallest possible increment, and set the tone for much of Europe's trading session, even if Asia shares ultimately closed largely in the red over skepticism over the authenticity of the GDP results. Worse, and confirming the global economy is now one massive circular reference, China accused the Fed's rate hike plans for slowing down its economy, which is ironic because the Fed accused China's economy for forcing it to delay its rate hike.

Oil companies have sold $61.5 billion in stocks and bonds since January as oil prices have tumbled. However, the fees geneated are a tiny fraction of the bank's real exposure to the energy sector, at over $150 billion. So have the banks learned their lesson?  "The bankers have gone through this before,” says Oscar Gruss’s Meyer. “They know how it works out in the end, and it’s not pretty." Then again, perhaps banks are just sailing on an ocean of liquidity allowing them to postpone the day of Mark to Market reckoning, especially since this time, everyone is in it together....

"Yellen is doing this with the blessing of the President because he doesn’t want to have a recession - or worse- in his administration. I’m a developer, I’m not complaining from my own standpoint, I’m just saying that at some point, you have to raise interest rates, you pay nothing. They are trying to put the recession - and it could be a beauty - into the next administration."

Capitalism isn’t – wasn’t – the problem. The culprit instead was unsound finance and deeply flawed monetary management. In short, Capitalism cannot function effectively within a backdrop of unfettered cheap finance. Things appear miraculous during the boom, and then the bust discombobulates. Contemporary central bank rate administration essentially abandoned the self-adjusting and regulating market system for determining the price of finance – so fundamental to Capitalism.