The world’s official economic institutions are run by people who believe in monetary fairy tales. The 70 words of wisdom below from IMF head Christine Lagarde are par for the course. She asserts that a new jabberwocky expression called “low-flation” is the main obstacle to higher economic growth in Europe and the DM areas generally and that it can be cured by more central bank money printing.
How long can America continue to burn up wealth? How long can this nation continue to consume far more wealth than it produces? The trade deficit is one of the biggest reasons for the steady decline of the U.S. economy, but many Americans don't even understand what it is. Our current debt-fueled lifestyle is dependent on this cycle continuing. In order to live like we do, we must consume far more wealth than we produce. If someday we are forced to only live on the wealth that we create, it will require a massive adjustment in our standard of living. We have become great at consuming wealth but not so great at creating it. But as a result of running gigantic trade deficits year after year, we have lost tens of thousands of businesses, millions upon millions of jobs, and America is being deindustrialized at a staggering pace.
So, they might be on the opposite side of the Atlantic Ocean, but the Europeans and the Americans have one thing very much in common.
European leaders may have felt a momentary brief lapse in the wary feeling of disdain that has existed between them for years now, but that was once exacerbated by the financial crisis and the entire PIGS- story that ensued, with the debt crisis.
The purpose of Quantitative Easing is to support the balance sheets of a few over-sized banks and to finance the federal budget deficit at an artificially low rate of interest. In other words, QE supports failed banks and federal fiscal irresponsibility. In order to successfully carry off this blatant misuse of public policy, the price of gold, a measure of the dollar’s value, must be suppressed. The Federal Reserve’s lack of integrity speaks volumes about the corruption of the US government.
Saxo Bank's CEO Lars Seier Christensen has made it abundantly clear in the past that the EUR is a monumentally bad idea; he notes, the huge European bureaucracy and especially the political elite that feed off the EU will do all they can to prevent the EUR’s fall, at least until it becomes inevitable. This will be either due to pressure from voters (even if they are very rarely consulted in this post-democratic political structure) or from the markets, which eventually must reassume their role that has been perverted beyond recognition during the crisis: the true role of allocating capital and pricing money and assets rationally. But, Christensen explains, if we are stuck with this "Currency of Mass Destruction", shouldn’t we at least try to make some money from it?
If the current pace of reductions continues it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year. But... the question is, can the US economy can stand on its own when QE completely winds down, not to mention when the Fed actually hikes rates? Amid such weak levels of economic growth does not leave much wiggle room to absorb an exogenous event, or even just a normal downturn, in an economic cycle. If the Fed is indeed caught in a liquidity trap, then the current withdrawal of support will quickly show the cracks in the economy pushing the Fed back into action. It is at the point of "monetary impotence" where the word "risk" takes on a whole new meaning.
In the WSJ’s February 24th exposé of the turmoil at the helm of Pimco, we saw a curious bit about tension at “the Beach” increasing in the summer of 2013. During this period, according to the Journal, conflict between then co-CIOs Bill Gross and Mohamed E-Erian became apparent to staff, and Gross restricted trading at the firm. We wanted to see what insights a quantitative analysis of Pimco Total Return Fund (PTTRX) could offer about the summer and Total Return’s recent performance, a topic of increasing scrutiny amongst the investment community.
As Fortune's Stephen Gandel begins, "if you hate the Fed, you have a new hero." He is referring to none other than GMO's Jeremy Grantham who aggressively takes on the status-quo-hugging faith in the omnipotence in Central banking prowess with fact and anecdote in this brief interview..."Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke's policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not..we have never had such a limited recovery."
Is capital adequacy really the answer to the question?
Apparently China did not get the memo that the Fed's apologists are furiously scrambling to packpedal on Yellen's "6 month" guidance in virtually all media outlets. The is the only way to explain why Vice Minister of Finance Zhu Guangyao said overnight that "the U.S. Federal Reserve will begin boosting interest rates within six months after exiting “unconventional” monetary policy, and that will have a “significant impact” on the U.S. and world economy, as Market News International reported earlier. Zhu told China Development Forum this weekend “we believe a the Fed meeting this October, the exit of their quantiative easing will complete." In other words while the spin for public and algo consumption is that the Fed will continue placating those long the stock market until everyone's price target on the S&P 500 is hit and everyone can comfortably sell into an ever-present bid, China is already looking for the exits. But while the end of QE appears a given, at least until the market realizes there is no handover to an economy that is a moribund as it has ever been in the past five years, and the Fed has no choice but to untaper and return with an "even more QE" vengeance (it certainly won't be the first time - just recall the "end" of QE1, QE2, Op Twist, etc), a bigger question surrounds whether China, already sliding in credit contraction and suffering a plunging stock market with its housing sector also on the edge of a bubble bust, is about to take over from the Fed and proceed with its own stimulus program. The answer is no.
Investors will be fleeing Europe, they’ll be moving from Russia, getting far away from the USA as they can get and they’ll be going where the sun shines longer: Africa. Why? Simply because it’s worth it and the investment prospects there are far greater than they are anywhere else right now.
The two big stories of our day are: (1) Our economic problems: The inability of economies to grow as rapidly as they would like, add as many jobs as they would like, and raise the standards of living of citizens as much as they would like. Associated with this slow economic growth is a continued need for ultra-low interest rates to keep economies of the developed world from slipping back into recession; and (2) Our oil related-problems: One part of the story relates to too little, so-called “peak oil,” and the need for substitutes for oil. Another part of the story relates to too much carbon released by burning fossil fuels, including oil, leading to climate change. While the press treats these issues as separate stories, they are in fact very closely connected, related to the fact that we are reaching limits in many different directions simultaneously.
In the 16 months since Japanese Prime Minister Shinzo Abe launched his bold plan to reflate Japan’s shrinking economy the yen has depreciated by 22% against the dollar, 28% against the euro and 24% against the renminbi. The hope was to stimulate trade and push the current account decisively into the black. Yet the reverse has occurred. Japan’s external position has worsened due to anemic export growth and a spiraling energy import bill: in January it recorded a record monthly trade deficit of ¥2.8trn ($27.4bn). Having eked out a 0.7% current account surplus in 2013, Japan may this year swing into deficit for the first time since 1980. So why is the medicine not working?
For a variety of reasons, the Federal Reserve is viewed by many as the financial Master of the Universe. Given how the media hangs on every pronouncement and the visible power of the Fed's policies to move markets, this view is understandable. But suppose rather than being masters of all things financial, the Fed was actually little more than a collection of incompetents trapped in a broken system that is beyond repair. Rather than Masters of the Universe, the Fed's governors are increasingly looking more like deer caught in the headlights of a transformation they cannot understand, much less control.