As we explained in great detail recently, the abundance of so-called cash-on-the-sidelines is a fallacy, but even more critically the we showed the belief that these 'IOUs of past economic activity' would immediately translate into efforts to deploy them into future economic activity is also entirely false. Simply put, there is no relationship between corporate cash and subsequent capital expenditure, nor is the level of capital expenditure even well-correlated with the level of real interest rates. At this point, as John Hussman explains, it should be clear that the mere existence of a mountain of IOUs related to past economic activity is not enough to provoke future economic activity. What matters instead is the same thing that always matters: Are the resources of the economy being directed toward productive uses that satisfy the needs of others?
Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum's previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term "monetary tectonics' to describe the 'tug of war' raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their "inflation signal" indicator.
A quiet week to send off August ahead of a deluge of key data next week and as the fateful Septembr 18 FOMC announcement approaches. Still, quite a few macro events to keep track of.
Confused what the (non) news of today's "unprecedented" forward guidance announcement by the ECB means? Shocked that the ECB is about as dovish as it has ever been? Then SocGen is here to explain, if only for all those who are seemingly stunned that the ECB isn't planning on hiking rates, or even "tapering" any time soon.
Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. As The Amphora Report's John Butler notes, it is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering. But to paraphrase those who oppose gun control, "FWMDs don’t cause crises, people do." But then who, exactly, does? And why? And can so-called 'liquidity regulation' prevent the next crisis? To answer these questions, John takes a closer look at proposed liquidity regulation as a response to the growing use of 'collateral transformation' (a topic often discussed here): the latest, greatest FWMD in the arsenal.
Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.
There has been much speculation in the recent past over what the bottom-line impact of surging stock buyback activity has been on the overall S&P earnings: after all, by removing shares from circulation, the denominator in "per share" calculation gets smaller and smaller with every incremental buyback. Courtesy of JPM we finally have a definitive answer to this long-running question. Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all "gains" of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.
There have been very few times where in my 40+ years of capital markets participation that I’ve strongly believed that we have witnessed a significant, material, public but seemingly under-discussed, under appreciated watershed event that will over the next several years, impact capital markets in a profound manner. The recent announcement by the Fed that they were to pursue the future course of monetary policy with direct regard to a specific, numerical level of unemployment in my mind, represents exactly one of those rare events. While the optics of the recent decision to accept an active target of the unemployment rate might be well meant, socially responsible and politically correct, the dependency upon the single datum construct already of a highly controversial nature may well likely reduce further the credibility of the Federal Reserve’s monetary efforts, thereby leading to slower economic growth, hiring and economic well being as adverse unintended consequences. Indeed, another triumph of form over substance wherein appearances of a literally wondrous intent might soothe the fevered brows of the public but remain entirely within the manipulative province of the data managers.
We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Inflation is a political phenomenon because monetary aggregates are not determined by market forces but are planned by central banks in agreement with governments. Inflation is a tax affecting all real incomes. Inflation is a precondition of extreme deflation: depression. Should in fact the overall debt collapse, there would be an extreme deflation or depression because the money aggregate would contract dramatically. In fact the money equivalent to the defaulted debt would literally vanish. It is for this reason that central banks monetize new debt at a lower interest rates, raising its value. All the financial bubbles and the mass of derivatives are just the consequence of debt monetization. How will this all end? In history, debt monetization has always produced hyperinflation. In Western countries, despite the exponential debt a runaway inflation has not yet occurred. Monetary policy has only inflated the financial sector, starving the private one, which is showing a bias towards a deflationary depression. Unfortunately governments and banks will go for more inflation. As history teaches, besides money the freedom of citizens can also be the victim.
We have long been pounding the table on what in our view is the biggest detriment to any future growth for not only corporate America, but the entire US (where, sadly, government investment IRRs just happen to be negative - a fact that most won't understand until it is too late, especially not self-anointed economic wisemen whose only solution to everything is "do more of the same" yet who thought the utility of the Internet would be eclipsed by that of the fax machine): the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. It turns out that, however, that there is more to the story, and as the following chart from SocGen's Albert Edwards shows, not only are companies using up what actual free cash flows they have for such stupid stock boosting gimmicks such as harebrained M&A (just look at the recent fiasco between HP and Autonomy to see how rushed M&A always ends), and of course buybacks, but they are now levering to the hilt to do even more of this. The last time they did this? The golden days of the credit bubble.
From the ECB's Virtual Currency Schemes, aka the "Bash Bitcoin Boondoggle" (p. 27): "A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity." Considering that this elucidation comes from the very same entity that launched the SMP, LTRO, OMT, EFSF, ESM, oh, and of course, TARGET2, and whose head said to not short the EUR as there is "no risk" whatsoever in holding said currency, one would expect that this definition is absolutely spot on...
Some wonder why we have been so convinced that no matter what happens, that the Fed will have no choice but to continue pushing the monetary easing pedal to the metal. It is actually no secret: we explained the logic for the first time back in March of this year with "Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing." The logic, in a nutshell, is simple: everyone who looks at modern monetary practice (as opposed to theory) through the prism of a 1980s textbook is woefully unprepared for the modern capital markets reality for one simple reason: shadow banking; and when accounting for the ongoing melt of shadow banking credit intermediates, which continues to accelerate, the Fed has a Herculean task ahead of it in restoring consolidated credit growth. Shadow banking, as we have explained many times most recently here, is merely an unregulated, inflationary-buffer (as it has no matched deposits) which provides the conventional banking credit transformations such as maturity, credit and liquidity, in the process generating term liabilities. In yet other words, shadow banking creates credit money which can then flow into monetary conduits such as economic "growth" or capital markets, however without creating the threat of inflation - if anything shadow banks are the biggest systemic deflationary threat, as due to the relatively short-term nature of their duration exposure, they tend to lock up at the first sing of trouble (see Money Markets breaking the buck within hours of the Lehman failure) and lead to utter economic mayhem unless preempted. Well, preempting the collapse in the shadow banking system is precisely what the Fed's primary role has so far been, even more so than pushing the S&P to new all time highs. The problem, however, as we will show today, is that even with the Fed's balance sheet at $2.8 trillion and set to rise to $5 trillion in 2 years, it will not be enough.
According to the just released M2 update, the broadest publicly tracked monetary aggregate (because the Fed doesn't have enough money to keep track of M3) just hit $9,991.5 billion, a $43 billion increase from last week. In other words, this is the last week in which M2 is under $10 trillion. So enjoy it while the "complete lack of penetration" of the monetary base into broader monetary aggregates, and of the Fed's reserves so tightly locked up in bank vaults, is still only 13 digits (most of it comprising of bank deposits which of course represent no inflationary threat at all). Next week it will be a record 14 digits for the first time, and well on its way to surpassing the $15 trillion held in the deposit-free shadow banking system as the importance (and inflationary convexity) of the two is rapidly interchanged.
On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio; the renaissance of gold in finance; "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.
Why Germany's TARGET2-Based Eurozone Preservation Mechanism Is Merely A Ticking Inflationary TimebombSubmitted by Tyler Durden on 06/30/2012 15:04 -0400
We have covered the topic of the German TARGET2 imbalances previously, both from the perspective of what catalysts can lead the Bundesbank to suffering massive losses (the one most widely agreed upon being a collapse of the Eurozone, which explains why even discussions of that contingency are prohibited in Europe), from the perspective of its being an indirect current account deficit funding mechanism, and from the perspective of what is the maximum size TARGET2 imbalances, funded primarily by the Bundesbank, can grow to before eventually causing irreperable damage to the Bundesbank. Still, there appears to be ongoing mass confusion about the topic, with numerous economists proposing contradictory theories, all of which supposedly rely on traditional economic models. Today, to provide some additional and much needed color, we once again revisit the topic of TARGET2, and this time we look at arguably the most critical question: what happens when the TARGET2 imbalance bubble ultimately pops. And here is where the true cost to Germans becomes apparent, because there is no such thing as a "borrowing from the future" free lunch. Which is precisely what TARGET2 does, only instead of a direct cost, the post-TARGET2 world will result in the now traditional indirect cost of all monetary experiments gone awry: runaway inflation.