Due to decades of unreserved credit growth that temporarily boosted the appearance of sustainable economic growth and prosperity, rational economic behavior cannot produce real (inflation-adjusted) economic growth from current levels. The nominal sizes of advanced economies have grown far larger than the rational scope of production that would be needed to sustain them. This fundamental problem explains best the current state of affairs: malaise (i.e., bank system de-leveraging and economic stagnation) spreading through the means of production and the need for increasing policy intervention to stabilize goods, service and asset prices (by depressing the first three and inflating the last?). We live and work in a contrived meta-economy that can be managed through narrow channels in financial and state capitals. Given the overwhelming past misallocation of capital cited above, we think the most important realization for investors in the current environment is that price levels of goods, services and assets may be biased to rise but they are not sustainable in real (inflation-adjusted) terms. The crowd is ignoring the obvious, as all signs point towards the next currency reset.
When the BOJ announced two weeks ago the full details of its expanded easing program, which amounts to monetizing a whopping $720 billion in government bonds over the next year (a move which makes even the Fed's own open-ended QE appear like child's play in perspective), one thing it did was lay to rest any hope of a rotation, great or non-great, out of bonds and into equities. The reason is simple: while the Fed is en route to monetize $1,080 billion in UST and MBS debt in the current year, when there is just $760 billion in net US issuance, what the BOJ has done is add a bid for another $720 billion when Japanese net supply of debt is just $320 billion in the next 12 months. In other words, between Japan and the US, there is now some $660 billion in secondary market debt that the two banks will have to purchase over and above what their respective treasury departments will issue.
While 'the rest of Europe' appears to remain in beggars-can-be-choosers mode with handouts from the core (even if there is a new template), it appears the people of Germany are beginning to want their slice of the cake. Following Lufthansa's rejection of the flight crews' union demands for a 5.2% pay rise (which we should be assured is entirely non-inflationary), the airline faces massive flight cancellations on Monday. As The BBC reports, only 30 of its more than 1700 scheduled flights will take place as Lufthansa looks to cut costs in the face of stiff competition from low-cost carriers. With Frau Merkel facing the recent women's quota setback, and a workforce seemingly becoming increasingly uncomfortable with their status quo, the rise of the 'Alternative for Germany' party makes the elections far from a foregone conclusion despite current majorities.
The main take away from events in Japan is that the BOJ shifted from a tactic of interventions (under former Governor Masaaki Shirakawa) to one of monetary policy (under current Governor Haruhiko Kuroda) . What strikes us is that the monetary policy is precisely to... well, destroy their money and in the process any chance of having a monetary policy. In our view, it was exactly because the Fed’s (undisclosed) intention was to engage in never ending Quantitative Easing, that Japan was forced to implement the policy undertaken by Kuroda. Coordination with the Fed was impossible. With Mr. Kuroda’s policy, we now have the BOJ with a balance sheet objective, the Fed with a labour market objective (or so they want us to believe), the European Central Bank with a financial system stability objective (or a Target 2 balance objective) and the People’s Bank of China (and the Bank of Canada) with soft-landing objective. It is clear that any global coordination in monetary policy is completely unfeasible. The only thing central banks are left to coordinate is the suppression of gold.
It has been a tumultuous and terrible week with every emotion being played out in public, real-time across every social media source. This is an attempt at visually preserving and memorializing this week's events.
Yesterday, we pieced together a photographic narrative of the very public events from Boston in the past week. Today, courtesy of NY Daily News, we get a first glimpse into ground zero: inside the suspect's home, an apartment located on the third floor at 410 Norfolk St. in Cambridge. From the source: "photos snapped by the Daily News show the unit in a Cambridge, Mass., building in disarray with clothes piled everywhere and a half-eaten meal left on the table." In other words, typical bachelor squalor, but that's about it. Most notably: not a trace of any explosive, incendiary or other bomb-preparing equipment or residue, no evidence of terrorist activity, and no weapons. So where did the two put together the numerous bombs they are said to have prepared?
The Fed's Jackson Hole, Wyoming symposium is one of the most sacred of annual Fed meetings: it is here that the Fed has historically hinted at any and all upcoming episodes of major monetary experimentation. As such, presence by the high priests of global monetarism is not only compulsory, it is a circular stamp of approval of the Fed's ongoing status quo-preservation capabilities. Which is why the fact that the man at the top himself, Ben Bernanke, whose term is due to expire just five months after this year's Jackson Hole gathering, will be absent "due to a scheduling conflict", is set to spark a fire of questions, first and foremost of which: is this the sign Bernanke is handing over the suitcase with the printer launch codes to some yet unspecified, second in command? Or, even worse for those addicted to monetary heroin, will Bernanke simply try to put as much distance as possible between himself and the place where (and when) the Fed announces the grand "open-ended" QE experiment is set to begin tapering?
Instead of frightening people away from gold and silver, the takedown of paper gold seems to have had just the opposite effect. People just can't seem to get enough. The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver. All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price. Will this massive run on physical gold and silver soon lead to widespread shortages of those metals? Premiums over spot prices are rising everywhere already. And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world. But this is what happens when you manipulate free markets - it often has unintended consequences far beyond anything that you ever imagined. The following are 10 signs that the takedown of paper gold has unleashed an unprecedented global run on physical gold and silver...
The existing (and ongoing) massive expansion of base money into the banking systems of the US, England, and Japan is without precedent. As Nomura's Richard Koo notes, at 16x statutory reserves, the liquidity 'should' have led to unprecedented inflation rates of 1,600% in the US, 970% in the UK, and 480% in Japan. However, it has not, yet. In short, Koo explains, businesses and households in these economies have stopped borrowing money even though interest rates have fallen to zero. There is little physical or mechanical reason for the BOJ’s easing program to work. But the program could also have a psychological impact - and Japanese media is on an 'inflation' full-court press currently. The risk here is that not only borrowers but also lenders will start to believe the lies. No financial institutions anticipating inflation could ever lend money at current interest rates. No actual damage will be done as long as the easing program remains ineffective. But once it starts to affect psychology, the BOJ needs to quickly reverse the policy and bring the monetary base back to 'normal'. If the policy reversal is delayed, the Japanese economy (and inflation) could spiral out of control.
Since 2009, Jim Chanos has been warning of the real estate bubble in China and he is as concerned as ever given the new government's actions (and likely inactions). The presentation (from last week’s 2013 Wine Country Conference) below lays out his thesis in gruesome detail and is unreasonably factual. With capital gains tax impositons and curbs on real estate, he is still not optimistic that the new government will enact any of the major reforms that are required - and will be unable to without blowing it all. Simply put (as Yahoo notes): China is adding the equivalent of $2.5 trillion of new debt annually; 30% of China’s GDP growth depends on new credit creation - half outside of normal banking circles; China’s excessive credit creation is invested in the wrong sectors; and every new dollar of debt created is yielding less growth in GDP. "There are myriad ways... to be short the Chinese property bubble," he adds, noting that, "the new [government]... has no incentive to change the system."
Massachusetts State Police have just released these stunning images of Dzhokhar Tsarnaev's 'heat signature' as he hid in the boat...
Last night we showed what turned out to be Dzhokar Tsarnaev's 'getaway' vehicle from images on his twitter feed. It turns out that in one of those images was another car - a black BMW 330Xi - that has become very important to the ongoing investigation. As The Daily Mail reports, last night two young men (light-skinned, thin, and short) described by neighbors as "nice boys" and their girlfriend were arrested in connection with the Boston Bombings. They are thought to be frtom Kazakhstan, and had not been since the bombings until the FBI raided their home - based on suggestions that Dzokhar had lived there. Despite the 'nice boys' comments, neighbors claimed the men had stolen the BMW but Azmat and Diaz, students at UMass, "who used to party til 3 or 4 in the morning," had one more unsettling surprise up their sleeves... the license plate of their car... "Terrorista#1".
Yesterday we reported that the initial, and largely expected, response by the father of the Boston bombing suspects, Anzor Tsarnaev, was that they had been set up by US secret services. As RT reported further, in an interview with Russian television the brothers’ father Anzor Tsarnaev also claimed that they are innocent and somebody might have set them up. "I’m sure about my children, in their purity. I don’t know what happened and who did this. God knows and he will punish them,” he told Zvezda channel. “Somebody might have set them up. I don’t know who and because of their cowardice killed the boy." It was not unexpected that the mother also decided to go the conspiracy route, and allege the boys conduct was "set up" and that the FBI had been following them for years. “They used to come [to our] home, they used to talk to me…they were telling me that he [the older, 26-y/o Tamerlan] was really an extremist leader and that they were afraid of him. They told me whatever information he is getting, he gets from these extremist sites… they were controlling him, they were controlling his every step…and now they say that this is a terrorist act! Never ever is this true, my sons are innocent!” More deranged appeals to some conspiracy theory involving the FBI? Possibly. But then we learn that the FBI did indeed interview Tamerlan nearly two years ago
Having been denied the ability to control guns by the democratically-controlled Senate last Wednesday in the biggest slap to the administration's face in a long time, Obama decided promptly to put as many guns as he possibly can in the hands of US soldiers and various non-Americans. First, it was the announcement that Obama would send more troops to Jordan to prepare for "stability operations" which is a euphemism for Syrian rebel support (much of it controlled by the otherwise dreaded Al Qaeda), and now we learn that Obama is set to announce the sale of $10 billion worth of weapons to Israel, Saudi Arabia and the United Arab Emirates. It appears that Obama, like a true expert of Sun Tzu, is well aware that the only way forward to a Nobel prize winning global peace, is under the barrel of a gun, or on the receiving end of a hot AGM-65 Maverick missile.