Purchasing Power

The Consumer Price Index measures the falling dollar, but only partially. As interest rates drop, you get less on your capital. Yield Purchasing Power shows the full damage.

At a stunning pace of 608 words in just 4 minutes, The Wall Street Journal's Fed-Whisperer, Jon Hilsenrath, has proclaimed his "common knowledge" meme for today's FOMC statement. Confirming that officials "aren’t at this point alarmed about the first quarter slowdown," and in fact stating they are confident of spending picking up due to consumer sentiment (which just fell)... which leaves them signalling no shift in policy stance - i.e. rate hikes are coming whether the economy can handle it or not...

What was once anathema has become conventional wisdom, and lately the only question when discussing the fate of Greece is not if but when it will default. Actually, there is another question: how? Because as the following UBS flow chart shows, when it comes to the matter of picking an obligation on which to not make a payment, Greece has a truly 5 star menu selection....

We are paying a high price for too many elites and their ‘frivolous cravings’. Nowadays many countries’ social and political structure relies on debt-driven consumption and increasing levels of entitlements. Blame the policy-makers as the “permanent lie [has become] the only safe form of existence.”

On the surface, Canada's 1.2% inflation is negligible, and barely enough to keep up with the pace of overall growth as mandated by a few central bank academics. It is below the surface, however, that one finds the scary truth. Because when stripping away the sliding energy prices (which at the recent pace of short covering among oil speculators are about to surge) some scary numbers emerge, such as a 3.8% monthly jump in food prices, primarily as a result of a whopping 30-40% increase in select meat prices in the last 8 months.  So how do ordinary people survive in an environment of soaring food prices?

What is the real story of energy and the economy? We hear two predominant energy stories. One is the story economists tell: The economy can grow forever; energy shortages will have no impact on the economy. We can simply substitute other forms of energy, or do without. Another version of the energy and the economy story is the view of many who believe in the “Peak Oil” theory. According to this view, oil supply can decrease with only a minor impact on the economy. The economy will continue along as before, except with higher prices. These higher prices encourage the production of alternatives, such wind and solar. At this point, it is not just peak oilers who endorse this view, but many others as well. In our view, the real story of energy and the economy is much less favorable than either of these views.

To maintain its hegemony, the U.S. must by all means prevent the emergence of rival powers and impede possible current as well as future threats that could emanate from oil states. The ideal condition for enforcing its own goals at a low cost would be the fragmentation of antagonistic power centers through ethnic and religious strife, civil wars, chaos and deep-seated mistrust in the Middle East – always following the well-known premise of ‘divide and rule.’ In fact, we are currently experiencing tremendous changes towards such a chaotic state of affairs.

The conventional class structure is divided along the lines of income, i.e. the wealthy, upper middle class, middle class, lower middle class and the poor. But this 3.5-class structure did not capture the changing nature of employment, income and wealth/political power; which more appropriately subdivides into America's socio-economic spectrum into nine classes. This is neofeudal, a term we use to describe a society and economy dominated by financialization and the apex of wealth and political power that wealth buys. The classes below this apex are either tax donkeys, Upper Caste technocrats serving the apex, or the lower classes that are bought off with social welfare and various modern iterations of bread and circuses.

Whether today’s most feted “intellectual leaders” and policy makers are correctly diagnosing problems or misdiagnosing them, their proposals are never anything but “viciously statist” to paraphrase Hans-Hermann Hoppe. They seemingly don’t realize that economic freedom is the sine qua non for personal freedom. One simply cannot have the latter without the former. None of them seem to believe that people can be trusted to be in charge of their own affairs. The debate over the “inequality problem” is an excellent case in point. It isn’t as if the knowledge required to understand the problem weren’t readily available. However, most of these people were educated in statist institutions, and have rarely been exposed to any non-statist ideological viewpoints. The possibilities offered by solutions that do not involve the State in every nook and cranny of the economy and our daily lives don’t even occur to them. And of course, the best social engineering plans are always their personal ones.

Mohamed El-Erian's comments this week caused a stir among the status quo-huggers, as they were clearly a valuation call on the financial markets suggesting that currently having capital invested was likely to yield substantially lower or negative return in the future. This is an extremely important concept in understanding the "real value of cash." Not unlike the rhetoric of the late 1990’s or mid-2000’s, there is no shortage of rationalizations for why such currently extraordinary valuations are reasonable and justifiable. The fact remains firmly in place, stocks are expensive. Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time. 

Centrally issued money centralizes wealth and generates systemic inequality. This is equally true of all centrally issued currencies.  But the inequity that is intrinsic to this system is politically, socially and financially destabilizing, and so this system is unsustainable.

Corporate profits are back at the levels reached in 1990, 1999 and 2008 that presaged recessions and a sharp downturn in sales and employment.

Money doesn’t go “into” the stock market – it goes through it from a buyer to a seller. The resulting price changes are purely changes in the relative value that people place on these pieces of paper, and amount to changes the amount of “paper wealth” in the economy. These changes should emphatically be distinguished from the real wealth of the economy, and the underlying stream of cash flows that will be generated over time.

With the Fed supposedly steeling itself at last to remove a little of its emergency ‘accommodation’, it has suddenly become fashionable to warn of the awful parallels with 1937 as an excuse The Fed must not act today. We strongly refute the analogy. Instead, the real Ghost of ’37 takes the form of mean-spirited and, counter-productive 'pitchfork populism' politics and the spectre should not be conjured up to excuse the central bank from further delaying its overdue embarkation on the long road back to normality and policy minimalism.

When discussing the Iran "deal" which isn't a deal, but merely a " Joint Comprehensive Plan of Action", there are two key things one must keep in mind: the location of Iran's nuclear facilities and its oil infrastructure. Here is a quick take on both.