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Russell Napier: "The Most Dangerous Thing In Finance Is The Thing That Never Ever Moves - Until It Moves"
By Russell Napier of ERIC
The PBOC – How to fail in business without really flying
"Terrain seems a bit unstable...and there seems to be no sign of intelegent life anywhere"
- Buzz Lightyear (Toy Story)
"That wasn't flying...that was falling with style"
- Woody (Toy Story)
Another day, another central bank failure. In a world of currencies backed only by confidence, every failure is masqueraded as success. Like the ballet dancer who transforms the stumble into a pirouette, central bankers, knocked to the ground by market forces, smile and pretend that this was all part of the routine. Financial market participants, having bet everything on the promised omnipotence of central bankers, do indeed seem happy to see genius in every stumble. However a fall is a fall regardless of the style of the descent. So when will investors see that the earth is rapidly approaching and that style is just style?
The key for investors today is to see behind the masquerade and the mask, the façade of those putting up a front behind a public face, and be able to tell the difference between the soaring flight of reflation and the perilous fall of deflation. The more attitude you hear from policy makers, the more you can be sure it’s style compensating for the lack of real substance and that this is falling and not flying. And as the attitude becomes more high-handed, the lower the altitude gets. The attitude quotient is rising rapidly.
Two weeks ago we noted the ‘flying’ undertaken by the Swiss National Bank as the market forced them to abandon their exchange-rate target. Deposit rates in Swiss Banks are now at such a low level that investors are better off converting deposits into bank notes and placing them under the bed. The Danish Central Bank has also instituted negative interest rates with the consequence that deposits in Denmark might also fly into paper. As the central bank managed to create over DKK106bn (US$16.3bn) in bank reserves, trying to stop a revaluation of their exchange rate last month, there will be no shortage of banknotes to go round should a ‘bank run’ from deposits to banknotes begin.
Taking interest rates so negative that they threaten a run on bank deposits should not be seen as success --- it is failure. Creating bank reserves at that pace should not be seen as success --- it is failure. The next failure may well be some government-inspired restriction on capital inflows. Well, you could call such restrictions, and risking the liquidity of banks, monetary success if you like, but then you probably also think it’s a success to throw the ball one yard from the touchline.
Last week the Monetary Authority of Singapore was apparently "flying", definitely not falling, when it cut interest rates and tried to devalue the SGD to defeat deflation. The Central Bank of Russia reduced interest rates while defending its exchange rate and, guess what, the currency fell. Most people, of course, would recognize that as simply falling, but as it was Russia you do have to ask did it just fall, or was it pushed ?
You may even have missed the news, that the Costa Rican central bank has just announced that they will be floating the Colon. Those of a squeamish disposition should certainly not try googling "floating colon" but, just take their word for it, the Colon will float. Elsewhere there were examples of more conventional falling, disguised as controlled flying, in the form of cuts in interest rates from Australia, Canada, Egypt, India, Pakistan, Peru and Turkey. The Turkish President has the perfect style for this sport and declared that interest rates had to fall as they were the cause and not the cure for inflation. As our hero himself remarked, ‘Buzz Lightyear to star command, I have an AWOL space ranger.’
So, will failure ever be seen as failure? Well, it will if the PBOC also fails. For we must remember that the most dangerous thing in finance is the thing that never ever moves --- until it moves. A generation of investors has grown up to believe that China can have whatever monetary policy it wants and simultaneously maintain a stable exchange rate. That generation now believes it will see a monetary reflation in China and a stable exchange rate and thus economic gravity defied. There is more evidence every day that China cannot achieve both goals.
Such a dual target might be possible if China ran a large external surplus and had effective capital controls. However, with China reporting a US$91.2bn deficit on its capital account in 4Q 2014 it is fairly clear that China’s capital control regime is not working. In 4Q 2014 the capital account deficit was larger than the current account surplus. Indeed, the total reported value of Chinese holdings of US Treasuries has been declining for over a year, despite regular steady rises in the price of Treasuries, suggesting that China’s current account surplus is at least offset by its capital account deficit. This is a huge change as China’s external surplus, a seeming economic certainty for two decades, has ceased to be.
Easing monetary policy and maintaining a stable exchange rate without an external surplus would be flying indeed. Other symptoms of the nature of this failure are also visible, with the offshore and onshore exchange rate to the USD declining and the price of Dim Sum bonds falling 4% from their November 2014 levels. This combination of a falling exchange rate and rising interest rates are compatible with the lack of an external surplus but entirely incompatible with consensus expectations for monetary reflation combined with a stable exchange rate. Since the PBOC cut interest rates in November 2014 and then yesterday reduced the banks reserve ratio the 12 month deposit rate has risen from 300bp to 465bp! Is this falling or flying? Sources familiar with the PBOC’s plans report to Bloomberg News that a further widening of the trading bands for the Yuan is being considered. Monetary policy is tightening, not easing and the PBOC will respond by jettisoning its exchange rate target. How much style they can muster for the fall only time will tell but this will be falling and not flying.
The PBOC are preparing to fall because of their failure to generate sufficient reflation while simultaneously maintaining the exchange rate with the USD. Something has to give and the result won’t be the exhilarating flight of reflation but instead an initial global deflationary shock that will see exports pour out of China at ever lower USD prices as the Yuan declines. Few will then believe in the omnipotence of central bankers: style over substance may still not have gone out of fashion, but style will just be style and falling, well, that will very much be seen as just falling. Ignoring the rapidly approaching ground and seeing falling as flying brings tranquility of mind but is that what they pay you for?
‘The test of the machine is the satisfaction it gives you. There isn't any other test. If the machine produces tranquility it's right. If it disturbs you it's wrong until either the machine or your mind is changed.”
Robert M. Pirsig, Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values
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The Super Bowl was as f***ed up as the markets are.
"The Super Bowl was as f***ed up as the markets are."
2nd and goal at the 1 yard line...let's throw a short pass!
What a bunch of fucking idiots...ANYTHING besides putting the ball in the air and Seattle wins.
I would have rammed it straight up the middle...stand up the line and push it into the endzone...game won.
And if it didn't work and you then used your last time out, what then? Try again?
Belichick punked Seattle by not calling a time out and instead let the clock run. Why not try a pass and preserve much of the clock and the last timeout for two more run attempts if the pass failed? It would have been genius if it worked.
Uh-oh, I just had a movement... I think that counts as dangerous...
QE, ZIRP, NIRP are just doubling down on past failures.
"I never make a call thinking it's gonna go bad," Carroll reflected."
WTF?
A pass "gone bad" at the 1 yard line and you lose the super bowl you dumb ass; and you don't consider that?
It's not like your passing percentage was 100% up to that point; no where near!
There were 26 seconds left and 1 time out, plenty of time for 1 or 2 plays; possibly for 3 with that time out.
Carroll was making sure he had three chances at the end zone when he decided to pass on 2nd down. Let's say he ran on 2nd and it failed. He uses the last time out to stop the clock. He then runs on 3rd down and fails. Clocks runs down and they lose.
You would still be calling him an ass for not using all three downs. He made a call. It didn't work only because of a unbelievable play by one Patriot, similar to the circus catch that put Seattle down on the 5 yard line two plays back.
Sometimes whatever a coach/money manager does will be considered the wrong thing. Sound familiar?
I know this isn't the sports channel. Too, I didn't watch the game, and really don't know all that much about football, but ... I did see a replay of the play sub judice and, whatever the merits of the call, it was patently stupid for the quarterback to throw the ball where he did. The receiver was not open or even close to it. There were no less than three players on the opposing team in very, very close proximity to the ball. Any one of them could have caught it. In fact, it surprises me that the first two didn't (or at least bat it down). Maybe that was because of the element of surprise, but the quarterback erred by sticking to (what I assume was) the plan and not adjusting to what developed. I also do not understand why the receiver didn't go deeper.
You are correct....you don't know much about football. ;-)
It was second down, only one timeout left and only 20 seconds left on the clock. The Pats had the zone defense and was expecting a run, wilson was on absolute fire and if you complete the pass, game over. If you throw an incomplete, you still have time left WITHOUT using a timeout and then you can run the ball and if that doesn't work, use your last time out. Then run the ball on the last play of the game if that didn't work as well. So people who keep pounding this is manipulated by the media and the fucking idiot collinsworth. It was a great play call after you look at the ENTIRE FUCKING SITUATION. Wilson just threw a pic and the game was over. Should have thrown a fade route.
"ANYTHING besides putting the ball in the air and Seattle wins."
Unless it doesn't. Multiple running plays at the goal line have failed before.
As an alternate ending did not occur, no one knows what would have happened. If the pass had worked, nobody would be calling it a stupid play.
Honestly, mate, do you really believe the NFL is not rigged?
The end of an era of external surpluses for China is definitely a sea-change in the world economic order. Coupled with the extraordinarily high debt born there at the local and regional levels already, it's a toxic cocktail. Over the last 3 decades, the western world has exported it's manufacturing to China, and along with it, the more extreme economic cyclicality that goes with it. Because China has had a tight central grip on its economy and a strong external surplus, they've were able to absorb the cyclical shock imposed on them in 2007-8 by the rest of the world. Without the external surplus, they won't handle the next shock so easily .
.@ml8_ml8
What's a touchline?
It's British for illegal pedophile touching by a royal.
Question everything, especially when you are certain you don't need to ask questions.
You can say that again!
Chinese got this one right:
2015 is a year of the sheep. God Save us
Yup and 2016 is the year of the monkey. Just think of how much fun that'll be :)
Bullish monkey hammers...!
Monkey? Monkey?? I'm a gorilla ya fucking clown!!
"Welcome to the Machine" - Pink Floyd.
Sooner or later, screwing people over moves the seemingly immovable masses to action.
There will be a lot of corpses to bury on Boot Hill when high noon arrives for the financial parasites.
...but as it was Russia you do have to ask did it just fall, or was it pushed ?
Priceless
Ah ... Richard Thompson.
If this guy were to tan A LOT he'd look like Nicky Barnes.
Talk to the Council, motherfuckas.
At any point in time, China can simply start selling its UST and USD for gold. The squeeze that China could put on gold would be entirely epic, putting all banksters out of business were it to demand delivery... It's coming. Eventually, the Chinese realize internal balance between consumption and production, rather than an export ponzi, is the way to go.
The Chinese have been whittling down their treasury holdings and increasing their gold position for a while now. They are now allowing certain other countries to use the yuan for trade. So they've set up a small-scale Bretton Woods system.
Gold is not a great store of value because it doesn't pay interest.
Gold is a great store of value because it doesn't pay negative interest. There, fixed it.
Very interesting, Russell. Nice roundup of events in non-headline central bank circles.
Give it up Tyler's ....I have been a doom and boomer for years. It all should have blown up years ago. It will not...not as long as we have a federal reserve.
O.W.
"It all should have blown up years ago. It will not...not as long as we have a federal reserve"
It blew up in 1931, despite having a Federal Reserve. The laws of math are bigger than the FED. 100% of bubbles burst and deflate. Blowing it bigger doesn't change the math. It still bursts and deflates. The bigger the amplitude to the up side, the bigger the amplitude to the down side.
Martin Armstrong: "While people rant about hyperinflation, they fail to grasp that in history it is NOT inflation that destroys empires, it is the collapse of debt."
"The default of Credit Anstalt in Austria which set off the sovereign debt default cascade failure was partly owned by the Rothchilds. This shook the very foundation of confidence. They capital turned against Germany and kept on going hitting even Britain. Each government was forced into default."
Greece says it is bankrupt. Greece is but the first of several dominoes standing in line to test the EU. Is Greece the rough equivalent of Credit Anstalt?
I agree. Its never going to be a rational free and unfettered market and the Keynesian machinations are just getting started. This party can go a lot longer than any of us here care to think. It reminds of the piece in Taleb's black swan on probability. The context was a person's age and it went something like this - If a person lives to 75 then there is (x) probability they will live to 90. And if they live to 90, the probability they live to 100 is (x), and so on. Taleb was trying to illustrate how government projects fail to get off the the ground and that the expectation that its going to be done at a declared such and such a time - is actually nonsense and that the longer time passes without the project being implemented, then the longer that duration of inaction will persist, to the extent that in all likelihood, it simply will not occur.
Same thing here. Look how long Venezuela et al have lasted without falling apart into social and economic chaos. By definition, one would have thought those economies should have collapsed decades ago. Nope, hasn't happened. So, why do we, every day think the US or China or whomever is going to be any different? Way I figure it, I will be in the ground before anything remotely resembling social disintegration occurs. Not going to happen - and not becuase of an intervention to the intervention - its just for any socialist economy that has lasted 100 years, it will in all probability, as per above, last another 100 years.
Derivative/shadow bank failures - whatever - all of that shit does not transcend the perseverence of an existing social/economic trend. Think like Taleb and it almost makes me want to sell my PMs and go long the SnP. Of course, the other part of Taleb's message is the tail risk and the expected value of an unlikely event - always being greater - also - than we care to imagine. cheers
Enough money talk.
Read a great bio on Deep Purple. Hard to imagine the backdrop to their travails was the Cold War.
Rock and Roll baby!
Speaking of rock bios, I can recommend Bill Wyman's book on the Rolling Stones. For some reason, I thoroughly enjoyed it even though I didn't and don't like their music (with maybe the exception of one or two songs), and never found them compelling personalities. It was oddly poignant and read very matter of fact; i.e., "I'm just an ordinary bloke and you're not going to believe what happened to me." The most interesting parts of the book talked about when they were out of the public eye. Must be devastating on those who really desire a 'normal life'. "Hey, I'll make a bunch of money and then me 'n Mary'll move to Montana."
Incompetent, psychopathic bankers.
Easy, next ....
What if the machine produces euphoria and tranquility for a while (Free money floating around as massive debts are built) then suddenly reality hits and its disturbs people and everyone is unhappy (for a long. long time). One must understand the machine to know whether it is seting you up for future despair. The machine is us.
"Knowing and Understanding the Machine" by Me
Ha he made fun of the Seattle Seahawks Super Bowl blunder so the status quo can conceptualize it.
Gold and interest rates?
Positive correlation.
Maybe I'm just too green to understand this fancy finance stuff, BUT, the way I see it these currency wars can't possibly produce any winners. At the end of the day, who are you going to sell exports to? If there are no consumers (because of no job growth) a cheaper TV is not going to be sold.