It’s the same old story being told in the London housing market and it’s like a re-run of a boring series or some B movie starring George Osborne, the UK Chancellor of the Exchequer and the Prime Minister David Cameron.
So it’s been Christmas and the holiday season and Santa had his sacks stuffed with chocolate. Then it was Cupid and Valentine’s Day and the chocolate got bought up in the shops and the loved one’s will be complaining that they put on too much on their hips or the boyfriend felt sick after gorging himself on the stuff and you still reply they look chocolate-boxy and fine.
When it comes to complex systems and unintended consequences, the key phrase is "be careful what you wish for." A lot of people are remarkably certain that their understanding of how systems will respond in the future is correct. Alan Greenspan was certain there was no housing bubble in 2007, for example (or he did a great job acting certain). Some are certain the U.S. stock market is going to crash this year, while others are equally certain that stocks will continue lofting higher on central bank tailwinds. Being wrong about the way systems responded in the past doesn't seem to deter people from being certain about the future. Complex systems don't act in the linear way our minds tend to work.
Yields on United States 10-year bonds rose above 3% at the beginning of January. The yield on the 10-year had reached its lowest point in history in July 2012 at 1.43% as a result of the Fed’s policy of Quantitative Easing. Since then yields have doubled as markets have incorporated the impact of the Fed tapering their purchase of U.S. Government securities. This raises the question, how high could interest rates go from here? Could interest rates move up to 3% per quarter? U.S. interest rates were that high back in 1981 when the yield on US 10-year Treasuries hit 15.84% and 30-year mortgage rates hit 18.63%. What about 3% per month?
We all knew that cultures were different and that we all had a unique way of doing things that run our daily lives. In Europe they tell the banks that they will die if they are weak (apparently, after the statement issued by Danièle Nouy, overseer of the Singe Supervisory Mechanism).
Imagine the scenario. The company accounts are going to get checked out; the accounts department doesn’t have them ready. There’s a gap in the figures and they don’t tally. Never mind, they may just get through at a pinch and nobody will notice.
Joseph Stiglitz, Nobel Laureate and Professor at Columbia University believes that the US economy was and still is sick. He believes that it will remain sick because of bad choices that have been made from 2008 onwards:
Inflation is hot property today, hyperinflation is even hotter!
As we noted previously there is a race to the bottom between the Argentine currency and its central bank's reserve balance as day by day both slide seemingly unceasingly. However, as JPMorgan notes in a rather aggressive note, a local press article sheds doubts over Argentina's 'honest' reporting of international reserves. Though long used to the lies about inflation (that ended up with the economy minster being fired and it being deemed 'illegal' to tell the truth), JPMorgan blasts that during a balance of payments crisis - as Argentina is undergoing - such manipulation of official statistics (and one so critical for market sentiment) is detrimental to the needed confidence building around the transition in the FX regime and is "a very very bad idea". Simply put, Argentina is over-stating its reserves... considerably.
In economics the chicken must always come home to roost. Man can only live beyond his means for so long. Bernanke’s reputation hinges upon the market not tanking as his successors close up the spout of gushing currency. The endpoint is coming. When it happens, the house of cards will tumble down. And with it will come the livelihoods and hopes of many. With every boom there is a bust. It’s an immutable fact of government intervention into the economy. As Bill Bonner writes, articles full of lavishing praise for Bernanke will begin appearing in coming weeks. Writing puff pieces on state bureaucrats is often a high-paying gig. But they all reveal a particular trend: celebrating the wise achievements of someone empowered to govern society. When businessmen are praised in print, their accomplishments are chalked up as minor victories reserved for the few. When the selfless man of charity is given his due, the praise is mild. When a lord of government sees the pages of a major periodical, it’s the kind of brown-nosing that would make a teacher’s pet uncomfortable. For now, Bernanke will bask in exaltation. But his just deserts are coming. You can bet $4 trillion on it.
(Just yesterday, the government there announced that the Chinese renminbi (among other currencies) will become legal tender in Zimbabwe.)
The 2008 crisis never ended as issues of excess credit and economic imbalances were never resolved. Turkey is the latest installment in the rolling crisis.
A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. In such a system with a constantly increasing money supply and, as a consequence, constantly increasing prices, it does not make much sense to save in cash to purchase assets later. A better strategy, given this scenario, is to go into debt to purchase assets and pay back the debts later with a devalued currency. Moreover, it makes sense to purchase assets that can later be pledged as collateral to obtain further bank loans. A paper money system leads to excessive debt. This is especially true of players that can expect that they will be bailed out with newly produced money such as big businesses, banks, and the government. We are now in a situation that looks like a dead end for the paper money system.
The Forex market is dead and dying, in parallel with the US economy; which is fitting, considering the US is still the world reserve currency.
Significant harbingers that have changed the Forex market forever: