Our country has entered a period of Crisis. We may or may not successfully navigate our way through the visible icebergs and more dangerous icebergs just below the surface. The similarities between the course of our country and the maiden voyage of the Titanic are eerily allegorical...
As the global equity and bond markets grind ever higher, abundant signs exist that we are once again living through an asset bubble – or rather a whole series of bubbles in a variety of markets. This makes this period quite interesting, but also quite dangerous. This can be summarized in one sentence: How could this be happening again so soon?
As virtual fantasy worlds go, Blizzard Entertainment’s Diablo 3 is particularly foreboding. Within this fairly straightforward gaming framework, virtual “gold” is used as currency for purchasing weapons and repairing battle damage. Over time, virtual gold can be used to purchase ever-more resources for confronting ever-more dangerous foes. But in the last few months, various outposts in that world have borne more in common with real world places like Harare, Zimbabwe in 2007 or Berlin in 1923 than with Dante’s Inferno. A culmination of a series of unanticipated circumstances has over the last few weeks produced a new and unforeseen dimension of hellishness within Diablo 3: hyperinflation. Considering the level of planning that goes into designing and maintaining virtual gaming environments, if a small, straightforward economy generating detailed, timely economic data for its managers can careen so completely aslant in a matter of months, should anyone be surprised when the performance of central banks consistently breeds results which are either ineffective or destabilizing? The Austrian School has long warned of the arrogance and naïveté intrinsic to applying rigid, quantitative measures to the deductive study of human actions and the events of the last week provide a stark reminder of the power and inescapability of the laws of economics.
Need a quick GDP boost in a world in which the uber levered consumer is tapped out and has no more savings or purchasing power, in which the government is facing an existential socialism or bust crisis even as global sovereign debt levels are at unseens before levels, and in which global trade has collapsed (so there go the C, G and (X-M) components of GDP)? No problem, just add some I for Inventory. Better yet, add a whole lot of I, especially if you are that global growth dynamo, China, which over the years many have accused of having taken the term "overcapacity" and put it through the Barry Bonds juicer yet where courtesy of a central-planning regime that has made sure nothing appears to be unused, except for the occasional ghost city or empty mall, proof of such overcapacity has been scarce in official, government data.
A look mostly at prices in the currency market and the outlook.
Despite efforts by the government to quell the black-market (or blue-dollar) for Argentina's foreign exchange, the unofficial rate surged yesterday to 10.45 Pesos per USD. This is now double the official rate of 5.22 Pesos per USD. This implicit 50% devaluation comes amid the growing realization that there is no savings option to maintain the purchasing power of the peso in the context of sustained high inflation (no matter what the officials say) and negative real interest rates. The government is not amused, suggesting the devaluation won't happen (just as Mexico did right up until the day before they devalued), "those who seek to make money at the expense of devaluations must wait for another government." Perhaps the government should be careful with their threats? And of course, this could never happen in the US or Japan, right?
Argentina's president Kirchner, a keen observer of recent events in Cyprus, has figured out a way to kill two birds with one stone, namely attempt to put an end to tax evasion, and fund the capex of the recently nationalized state oil company YPF (now that its former owner, Spainish Repsol, is less than keen to keep investing in its former Argentine subsidiary). To do that she will present the local tax-evading population (pretty much anyone with any disposable income and savings) with a simple choice: buy a 4% bond to fund YPF "growth" or go to prison.
The almighty dollar is looking less mighty these days. By almost every measure, the purchasing power of the US dollar is in precipitous decline.
The U.S. stock market rally has recently passed its fourth anniversary after the terrifying lows of March 2009. During that time, massive and unconventional reflationary policy from the Federal Reserve has managed to lift the S&P 500 to new all-time highs. But perhaps even more improbably, it has finally (for now?) built a floor under U.S. residential real estate prices. This 'Less Bad' Recovery continues in other ways as well. Jobs have been created. Not good jobs. Not high paying jobs. Not full time jobs. But some rudimentary sets of tasks and responsibilities that could be called jobs. There has also been deleveraging. But here, too, the scale of debt reduction is nothing close to the unadjusted figures often touted in the media. Americans, and more generally, OECD citizens, remain highly burdened by debt. When combined with poor wage growth, this explains the continued suppressed demand so pervasive in developed nations. And of course, oil prices – as expressed through prices at the pump – remain stubbornly elevated and are likely to persist at their new elevated level. Combined, these factors have kept a lid on consumer confidence and make for a precarious disparity between the stock market and the real economy. Welcome to the Great Constraint - a growing failure to thrive.
Before 1971, U.S. dollars were backed by gold. This meant that the federal government could not print more money than it could redeem for gold. While this constrained the federal government, it also provided citizens with a relatively stable purchasing power for goods and services. As Learn Liberty explains in this simple 4 minute clip, today's paper currency has no intrinsic value; it is not based on the value of gold or anything else. Under a gold standard, inflation was really limited. With floating value, or fiat, currency, however, some countries have seen inflation reach extremely high levels - sometimes enough to lead to economic collapse. Gold standards have historically provided more stable currencies with lower inflation than fiat currency. Of course, this leaves the question open of whether the United States return to a gold standard? But does provide some hints.
Last week at its regular policy-setting meeting, the Federal Reserve affirmed that it is prepared to increase its monthly purchases of Treasuries and mortgage-backed securities if things don’t start looking up. In all, the Fed has pumped more than a half trillion dollars into the economy since announcing its latest round of “quantitative easing” (QE3) in September 2012. With no recovery in sight, where’s all this money going? It is creating bubbles. Bubbles in the housing sector, the stock market, and government debt. In the meantime, real families are suffering. We are certainly not in a recovery. We don’t see the long unemployment and soup kitchen lines like in the Great Depression, but that’s just because the lines are electronic now. We know what the real solution is: allow the marketplace to work. Restore sound money to the economy and the American people. Sound money is the bedrock for prosperity and the best check on big government and crony capitalism.
With equity valuations no longer levitating but in a different, 4th dimension altogether, and credit spreads compressing dramatically (and unreasonably)... It is in situations like these, when the crash comes, that the proverbial run for liquidity forces central banks to coordinate liquidity injections. However, something tells me that this time, the trick won’t work. Over almost a century, we have witnessed the slow and progressive destruction of the best global mechanism available to cooperate in the creation and allocation of resources. This process began with the loss of the ability to address flow imbalances (i.e. savings, trade). After the World Wars, it became clear that we had also lost the ability to address stock imbalances, and by 1971 we ensured that any price flexibility left to reset the system in the face of an adjustment would be wiped out too. From this moment, adjustments can only make way through a growing series of global systemic risk events with increasingly relevant consequences. Swaps, as a tool, will no longer be able to face the upcoming challenges. When this fact finally sets in, governments will be forced to resort directly to basic asset confiscation.
For 727 editions, and nearly 30 years, Bill Buckler, the "captain" of the free market-praising Privateer newsletter provided a welcome escape from a world overrun with "free-lunch" economists, "for-hire" politicians, "crony-capitalist" oligarchs, "heroin-addict" bankers, "the-solution-to-record-debt-is-more-record-debt" Keynesians, and all those other subclasses of that species which Einstein, or whoever, described so aptly in saying that they all expect a different, and happy, outcome when applying the same flawed methods over and over. And for 30 years, Buckler's steadfast determination and adherence to his arguments, beliefs, reasoning and ironclad logic brought him countless followers, all of whom are now able to see past the bread and circus facade of a world every day on the edge of political and social collapse. Sadly, all good things come to an end, and so does The Privateer. We are delighted to celebrate its illustrious memory by presenting to our readers the final, must read, issue of the newsletter which encapsulates the philosophy and ideology of its author - a man much respected and admired in the free market circles - and thirty years of objective, unbiased market and economic commentary, best of all.
The pricing of 'safe' assets reflects the ongoing uncertainty in a world that is in the grip of the lunacy of policymakers who have seemingly lost all sense of perspective and are engaged in a huge gamble. This essential fundamental backdrop has not changed for the better lately, but for the worse. What this once again demonstrates is that intervention by central banks is creating incentives for many institutional investors to take inordinate risks in the name of preserving the purchasing power of the savings that have been entrusted to them. The problem is that the gains of today are absolutely certain to become the losses of tomorrow for investors taking the bait, as the echo bubble created by loose monetary policy is fated to turn into a major bust once the boom has played out. When the tide is going out, a great many naked swimmers will be revealed.