Salient

Does the use of leverage (properly defined) and derivatives (properly defined) create trading risks that wouldn’t be there if you just bought the Vanguard 60/40 fund and called it a day? Sure. But we believe risk-balancing strategies mitigate far more dangerous risks to a public pension portfolio – particularly an over-reliance on equity markets. Public pensions are complex entities whose liability structures are often many times greater than the size of their investment portfolios. The common practice to resolve this dilemma has been to pursue an equity-dominated asset structure that has greater chances of achieving the required return to make the entire structure work. The problem is that equities are themselves leveraged, but it’s hidden leverage and thus hidden risk.

Climate change continues to drive energy policy, despite the fact that there is no way to reconcile eradicating energy poverty in much of the world with reducing carbon dioxide emissions. This is one of the many conundrums of the climate change debate - a debate that has been taken over by social media and propaganda, while scientists struggle to get back into the game and engage the public.

It’s a funny world when stocks can soar on a -6.8% Japanese GDP print but stumble when a Russian armored personnel carrier finds itself on the wrong end of a Ukrainian howitzer shell. That’s what you get, though, in the Golden Age of the Central Banker, as all events are filtered through the narrative of central bank control.

The late, great critic of the American Imperium, Chalmers Johnson, popularized the salient concept of “blowback”. That is, the notion that if you bomb, drone, invade, desecrate and slaughter - collaterally or otherwise - a people and their lands, they might find ways to return the favor.

Junk bond investors are running for the hills. But there are no hills.

Today, everyone believes that market price levels are largely driven by monetary policy and that we are all being played by politicians and central bankers using their words for effect rather than direct communication. No one requires convincing that market price levels are unsupported by real world economic activity. Everyone believes that this will all end badly, and the only real question is when.... There’s absolutely nothing sincere about the public sphere today, in its politics or its economics, and as a result we have lost faith in our public institutions, including public markets. It’s not the first time in the history of the Western world this has happened … the last time was in the 1930’s … and over time, perhaps a very long period of time, a modicum of faith will return. This, too, shall pass... It’s the public markets where faith has been lost, and that’s why the Golden Age of the Central Banker poses existential risks for firms and business strategies based on trading activity within those public markets.

With regard this week’s market debacle, the question, of course, is whether this was simply a blip – yet another one-day BTFD opportunity – or the start of something bigger and worse. The answer, we think, depends on how the media Narrative surrounding the week takes shape over the next several days. Right now the media Narrative about the week is in complete disarray, because there was no obvious “reason” for the sell-off. Or rather, there were too many possible reasons, from bad earnings reports to the Argentina default to worries about a strong jobs number to Espirito Santo cracking up to new Russian sanctions to just a generic “we were overdue for this”. From a game theory perspective, this sort of seemingly out-of-the-blue sharp move had very little to do with anything that happened this week, but is a natural by-product of the Common Knowledge Game in action.

In the Golden Age of the Central Banker it is impossible to distinguish fundamental economic reasons for asset class price movements from politically-driven strategic reasons. When words are used for strategic effect rather than a genuine transmission of information you create a virtual stalking horse. It’s a focus on how something is said as opposed to what is described. It’s a focus on form rather than content, on truthiness rather than truth. It’s why authenticity is as rare as a unicorn in the public world today.

The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and... should we go on? ...were isolated incidents. "...with apologies to Lewis Carroll, here’s the choice facing our modern-day Alice (Mario Draghi) – does (s)he sing a lullaby that keeps the Red King (investors) sleeping for a few more years, albeit at the cost of drinking a terrible potion that will turn her into a hideous giant... or does she let the Red King wake up, shattering the dream and risking the existence of everything, herself included, but preserving the story of her beautiful face and form?" If we were betting men (and we are), we’d wager on Draghi drinking the potion and keeping the dream alive, no matter how complicit it makes him in preserving a very ugly and very politically-driven status quo. But there’s a non-trivial chance that it’s just too much to swallow...

Gold has meaning to China in the same way that gold has meaning (or should have meaning) to Western investors. Not as an inherent store of value or some timeless monetary standard... but as a symbol of failed confidence in Western central bank control over market outcomes. To both investors and China, gold is an insurance policy against Western central bankers losing control of their massive monetary policy experiment. The difference is that China has the power to do something about it.

The jobs report has little value if we don't peer beneath the glossy veneer.

In a QE dominated world - in the Golden Age of the Central Banker - renminbi strengthening has been an unmitigated disaster. Chinese political stability depends on the actual production of actual things by actual people working in actual factories, and the prospects for that real economic growth are made significantly worse the longer the West persists in favoring financial asset inflation and the ossification of a low-growth status quo. While the West may be able to accept, even celebrate, unlimited private wealth – China cannot. Not if it wants to remain a politically unified Great Power. We think this is just the start of a multi-year weakening of the renminbi, a sea change in Chinese monetary policy that will inevitably create broad political tensions with the US and make Japan’s devaluation/inflation course infinitely more difficult to achieve.

The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions.  Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.

Pundits enjoy pointing to NYSE margin debt as an indication of overall system leverage, and how prone to margin calls and liquidations the investor class may be at any given moment. However, in the new normal, in which sophsiticated investors fund themselves via completely different mechanism - mostly involving repo and other shadow banking conduits - margin debt has become a very much irrelevant indicator of overall leverage.

Fresno police have arrested a 64-year-old man suspected of cooking methamphetamine in his apartment at a retirement community. KFSN-TV reports Robert Short was pulled over as part of a routine traffic stop late Saturday and officers found meth in his car. Investigators then went to Short’s apartment in the California League-Fresno Village, where they found a half pound of meth, heroin and materials for a meth lab.