This month's Bill Gross letter, notably shorter than usual, is as close to the bond manager discussing an Austrian economics worldview as we will likely ever see him: in brief, it's all about the credit/money creation, with an emphasis on the use of proceeds of said creation under ZIRP, i.e., malinvestment , or as Gross puts it: "credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring."
Having singularly failed to reform or restructure their dilapidated economies, many governments throughout the West have left it to their central banks to keep a now exhausted credit bubble to inflate further. Unprecedented monetary stimulus and the suppression of interest rates have now boxed both central bankers and many investors into a corner. Bond markets now have no value but could yet get even more delusional in terms of price and yield. Stock markets are looking increasingly irrational relative to the health of their underlying economies. The euro zone looks set to re-enter recession and now expects the ECB to unveil outright quantitative easing. If the West wishes to regain its economic vigour versus Asia, it would do well to remember what made it so culturally and economically exceptional in the first place. We seem to be close to the endgame.
For close to 300 years, inflation in the US remained very subdued. Small spurts occurred around major wars (Revolutionary, Civil, WW1, etc), but after each, inflation quickly trended back down to its long-term baseline. If you lived during this stretch of time, your money had roughly the same purchasing power your great-grandfather's did. That is, until the "Nixon shock" in 1971, when the dollar's remaining ties to gold were severed. Then inflation exploded. And the inflationary moon-shot has continued since, up to present day. So, we've become used to a system in which our money loses purchasing power over the years. For anyone aged 50 or younger, it's pretty much all we've ever known. But it doesn't have to be this way.
This seems to be the biggest question in financial markets for me right now because the math just doesn`t add up any way you slice it.
The Federal Reserve’s prevailing view of the world seems to be that a) QE lowers interest rates, b) lower interest rates stimulate jobs and economic activity, c) the only risk from QE will be at the point when unemployment is low enough to trigger inflation, and d) the Fed can safely encourage years of yield-seeking speculation – of the same sort that produced the worst economic collapse since the Depression – on the belief that this time is different. From the foregoing discussion, it should be clear that this chain of cause and effect is a very mixed bag of fact and fiction.
Argentina’s economic minister, Axel Kicillof, has become famous for his assertion that it is possible to centrally manage the economy now because we have spreadsheets such as Microsoft Excel. This assertion comes from the mistaken view that the cost of production determines final prices, and it reveals a profound misunderstanding of the market process. This issue, however, is not new. The first half of the twentieth century witnessed the debate over economic calculation under socialism. Apparently, Argentine officials have much to learn from this old debate. The problem is not whether or not we have powerful spreadsheets at our disposal; the problem is the impossibility of successfully creating a centrally-planned market. Just ask Maduro...
Why can't, or rather won't, the Fed let the bubble market collapse once again? Simple - as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys.
Suppresses true money velocity concealing real inflation risk to the economy
When considering the catalysts for silver, let’s first ignore short-term factors such as net short/long positions, fluctuations in weekly ETF holdings, or the latest open interest. Data like these fluctuate regularly and rarely have long-term bearing on the price of silver. We're more interested in the big-picture forces that could impact silver over the next several years. The most significant force, of course, is governments’ abuse of “financial heroin” that will inevitably lead to a currency crisis in many countries around the world, pushing silver and gold to record levels; but here are seven more...
Are the crafty casino courpiers finally cashing out their cronies' comped chips at the crooked capitlaism craps tables?
To demonstrate it hasn't failed, the Fed must taper/withdraw its monetary heroin. If the stock market tanks as a result, and the Fed rushes to the rescue with more free money for financiers, that will also prove the Fed has failed: if the economy and financial system is as robust as the Fed claims, why does it need to be rescued yet again after six long years of unprecedented injections of monetary heroin? It's a double-bind with no escape. No matter what the Fed chooses to do, the failure of its policies to help households and Main Street while enriching wall Street and the banks will be revealed to all.
"One reason we know voters will embrace populism is that they already have. It’s what they thought they were getting with Obama...He turned out to be something else altogether. Not long ago optimism was in vogue. Obama’s slogan then was “Yes we can.” Today it could be “It turns out we can’t.”"
Before you jump on the Bull market bandwagon of "don't fight the Fed," perhaps you should take a look at the quality of the debt the Fed has enabled and the diminishing returns on all that debt.
More basic suggestions for those who are seeking shelter from the coming storms of global financial crisis and recession (part 1 here).