Monday, December 31, 2012

It's time to reconsider European stocks


Sunday, December 30, 2012

2013 - year of the black swan

Promises at New Year's Eve

Thursday, December 27, 2012

Keynes and Hayek - a battle without an ending

Why do smart people still choose Keynes over Hayek?

Looking back over the last few years you have to ask how intelligent people, examining the evidence, can still choose Keynes over Hayek

On October 17th a group of concerned economists wrote to the Times. The current economic woes, they wrote, were down to insufficient spending/increased saving. “[W]hen a man economizes in consumption”, they argued, “and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources do not find a new home waiting for them.” Crucially, “In present conditions their entry into investment is blocked by lack of confidence.” The government should step in and spend to make up the shortfall they said.
On October 19th another group of economists replied with their own letter to the Times. They believed that the cause of the economic problems was monetary mismanagement which had created “a deficiency of investment-a depression of the industries making for capital extension, &c., rather than of the industries making directly for consumption.” They argued for the necessity of increased saving to readjust this and explicitly rejected any role for government spending, writing that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities.”
But this was October 1932 and the letters were written by John Maynard Keynes and Friedrich von Hayek. It says much about the essentially static nature of economic knowledge that an 80 year old debate remains so compelling today that it continues to inspire radio shows, debates, books, and even rap-offs..
Comment: Smart people also prefer McDonald's, don't they?

The legacy of Lord Keynes

The Unholy Alliance of John Maynard Keynes

"... According to Dr. Andrew Gelman, Professor of Statistics and Political Science at Columbia University, “the law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple. It operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society, in contrast, is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.” Professor Gelman’s statement seems equally apropos to central banking...
The decline of the U.S. economy is the logical outcome of Keynesian economics, which enshrines central economic planning and embraces central banking. The unholy alliance of Leviathan, Ziz and Behemoth (the federal government, the Federal Reserve and Wall Street) has all but eliminated capitalism and has transformed the United States from a burgeoning free market economy into a failing corporate state.

Pity the poor euro shorts



Tuesday, December 25, 2012

Poor Piers - naughty chap wants the US to disarm

White House Petition To Deport Piers Morgan Passes Threshold, Now At 60,000 Signatures

Tyler Durden's picture

Frankly we have no idea what this is all about, because as far as we are concerned, CNN long ago became a politicized, ratings-starved farce, wrapped in a joke inside a humiliation (after once upon a time being the only go to place for objective breaking news), but it is rather funny. The Hill reports that "a White House petition calling for the deportation of CNN personality Piers Morgan, a U.K. citizen, over his recent comments criticizing U.S. gun laws rocketed past the 25,000 signatures it needed for an official response Monday. As of this writing, nearly 40,000 people had signed a petition demanding “Mr. Morgan be deported immediately for his effort to undermine the Bill of Rights and for exploiting his position as a national network television host to stage attacks against the rights of American citizens.” A petition on the White House's “We the People” website needs 25,000 signatures in the first month of being posted to earn an official administration response. “I don't care about petition to deport me,” Morgan tweeted Monday. “I do care about poor NY firefighters murdered/injured with an assault weapon today. #GunControlNow.”

Friday, December 21, 2012

2012 - The year in review

2012 - The year in review
Antony P. Mueller

As we approach the end of the year it turns out that 2012 was a year when a lot happened but little changed.  There was a fierce presidential election campaign in the United States and after the results were in it was the same as before. China installed a new governmental body yet it is hard to tell the difference between the new administration and the old. Almost every day throughout the year the European debt crisis was in the news but by the end of 2012 the situation is neither better nor much worse than at the beginning of the year. Likewise, the debt situation of the United States is as severe as at the beginning of 2012 with no solid improvement of the economy over the year. While 2012 may go down in history as the year of much ado about nothing, 2013 may be the year of the great change.

Economic growth

There is little prospect for very much higher growth rates than what we’ve experienced over the past couple of years. Maybe the world economy is already in something that could be called the “Great Stagnation”. In 2012 each quarter looked as if the rest of the world were following Japan which entered stagnation in the early 1990s and has been in it ever since despite fierce monetary easing and massive government spending. The lessons from the Japanese experience have not yet been learnt. The main lesson says that to adapt to low growth is better than trying to fight it. In dealing with this new kind of stagnation conventional macroeconomic policies are of no avail. On the contrary: they do more harm than good. Firstly, instead of boosting economic activity, they structurally weaken the economy and, secondly, whereas the macroeconomic stimulus programs do not work they leave behind a mountain of public debt and wreak havoc with the financial system due to the policy of extremely low interest rates.

Price inflation

The world is drowning in liquidity created by central banks but an equivalent rise of inflation has not yet 
happened. Most of the newly created money is sitting on the sidelines. Commercial banks use the reserves as a cushion of safety while companies hoard cash partly as protection against potential risks, partly because managers feel that there are no lucrative projects out there. The global price level has remained relatively stable because of international competition. As long as the “Great Stagnation” continues, there is a limit to rising prices. It is only if the phase of stagnation were to give way to stronger economic growth that the price level may increase. As to prices we live in the paradoxical situation that the way out of the stagnation will probably be accompanied by a drastically rising price level which in turn would mean that such as recovery would most likely be short lived. Here, too, the lesson of 2012 is to adapt to the unavoidable and to be careful with political activism.

Official unemployment rates have come down in the United States not so much because of a pick-up of economic activity, but because the share of discouraged worked has been rising. While the officially published statistics shows a decrease, the broader measure shows an increase of the already high level of unemployment. The situation is even bleaker in the European crisis states such as Greece, Portugal and Spain. Although the overall economic situation is better in Italy or France, unemployment in these countries has risen from their already high level. These persistent high levels of unemployment pose a huge burden on public finances which gets squeezed from both sides as social expenditure increase while revenues fall.

Global trade

Although many parts of the world economy are in turmoil, international trade has kept up fairly good over the past year and it seems as if the process of specialization were to continue on a global scale. Yet most of the old problems are still with us and the year 2012 has brought not only no solution but also got us not much closer to a solution. The huge international trade imbalances have not disappeared. The US is still stuck with a gigantic trade deficit which means that the country depends on foreign funds. The counterpart to the United States is China that records persistent trade surpluses and by the same token provides funds to be invested overseas, particularly in US government bonds. China, along with Japan, is the main international financier of the American trade deficit. It is hard to tell how much longer such an imbalance could continue. Theoretically it will end when it is no longer beneficial for either side. This point is getting closer. The US has become more fearful about its debt problem while China must consider a shift of its production from exports to the interior market. This process will take a long time but it looks as if we are already in the early stages of such a shift, which may continue for many years to come. 

International debt

The year 2012 may well be remembered as the year of the European debt crisis. Hardly a day has gone by without some news ticker announcing the end of the euro, the break-up of the European Union and the collapse of the European economy. Yet nothing of this kind has happened. Greece is still a member of the euro zone and its latest debt buy-program was successfully accomplished. In the meantime the US moves closer to its “fiscal cliff” and is facing new downgrades of its debt. The US has abstained from austerity partly because 2012 was an election year. This means the United States will now have a lot to do in order to catch up. While the current political discussions concentrate on how to avoid the fiscal cliff, a fall over the fiscal cliff is probably the best thing that could happen now to America because it would force the US government and Congress to address the American debt problem in the manner of urgency and seriousness which is needed.  


2013 promises to become an interesting year – which means that for most people it won’t be a pleasant time. If there should be a more remarkable uptick of economic activity, price inflation most likely will emerge with it and the recovery would prove to be unsustainable. Mass unemployment will continue in the US and in Europe and pose a heavy burden on public finances. The European debt crisis is not yet over while the hot phase of the US debt crisis is about to begin. There is little prospect for Japan to get out of slump while at the same time China’s growth rates will get lower. Brazil, another member of the ominous BRICs, has tanked in 2012 and the prospects for economic growth in 2013 are not much better. The same holds for Russia. India has all the potential but is hampered by many obstacles to become a strong economy. The world economy and world politics is full of tensions waiting to erupt.
While 2012 was a year in which many things happened but little changed, 2013 may be the year when a few key events may well cause drastic change.

Capital markets - total return 2012

Bond yields PIIGS

Wednesday, December 19, 2012

War is over - the euro won

The assault on the euro has failed. The weapons brought into the battle were mainly rhetorical and fired by an intellectually weak bunch under the leadership of Krugman, Stiglitz, Rubini & Co. - Too bad for those guys who bet real money. Anyway, It has always been only for fools to follow the advice by Krugman & Co.  




Tuesday, December 18, 2012

Euro-dollar exchange rate

EUR-USD       1.3222

Comment: I notice a strange silence of our intellectual loudspeakers (Krugman, Stiglitz, Rubini etc.)

Monday, December 17, 2012

India or China?

Why India Will Displace China as Global Growth Engine

Moody Blues

Moody’s Gets No Respect as Bonds Shun 56% of Country Ratings

The global bond market disagreed with Moody’s Investors Service and Standard & Poor’s more often than not this year when the companies told investors that governments were becoming safer or more risky.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P.
Comment: Fake business to begin with.

Tuesday, December 4, 2012

Money, it's a gas

Federal Reserve Buying 90% of New Bonds

According to JPMorgan (who would know since as a primary dealer, they flip treasury take-downs to the Fed roughly 30 minutes after issuance for a handsome profit), the Federal Reserve is currently absorbing approximately 90% of new dollar-denominated fixed-income assets. 
Go back and re-read that last sentence.  That’s right, even the financial MSM is now admitting that the Fed is now nearly entirely monetizing the US deficit outright.
This is why QE4 will be announced next Wednesday (which has already been fully priced in thanks to multiple leaks from the Chicago Fed’s Evans as well as Bernanke last week) and why the Fed will ramp up outright purchases to $85 billion a month ($1.02 Trillion/yr) when operation Twist ends- there are simply no remaining buyers of US debt. 
Those who fail to see where this is headed may wish to acquire a copy of When Money Dies to grasp how the situation played out in Weimar Germany.

Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.
The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.
Read more:

Comment:  The coming US hyperinflation is probably the first hyperinflation that was created with full intent.

Tuesday, November 27, 2012


"What has been, what ever must be, the consequence of such a sudden and prodigious inflation of the currency? Business stimulated to the most unhealthy activity; a vast amount of over production in the mechanick arts; a vast amount of speculation in property of every kind and name, at fictitious values; and finally, a vast and terrifick crash, when the treacherous and unsubstantial basis crumbles beneath the stupendous fabrick of credit, and the structure falls to the ground, burying in its ruins thousands who exulted in the fancied security of their elevation. Men, now-a-days, go to bed deeming themselves rich, and wake in the morning to find themselves stripped of even the little they really had."
William Leggett, journalist in 1837 

Sunday, November 18, 2012

I smell war is in this air


Kyle Bass, Larry Edelson, Jim Rogers and Marc Faber Predict Widespread War

Kyle Bass writes:
Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.

Comment: Clausewitz wrote that war is politics with other means. I say that war is the quintessence of politics. All politics leads to war. War is the ultimate fulfillment of politics. In order to abolish war we must abolish politics. The question is how.

Monday, November 12, 2012

Central banking

Central Banking: What Is It Good For?

While the failure of fiscal policy is widely recognized, monetary policy still enjoys credibility, not only among policy makers but also with professional economists. Yet deeper investigation shows that monetary policy is like shooting in a dark room. Disaggregating the highly aggregated variables of standard monetary economics reveals that monetary policy suffers from a profound pretense of knowledge. When central banks are not able to fulfill their claim and promote economic growth, employment and price stability, the question comes up what the real mission is that they are after. The Federal Reserve System was founded in 1913 with the intention to safeguard the big players of the financial system. After a period when central bankers claimed that they would also promote prosperity we are now back at the old paradigm...."
Read all

Friday, November 9, 2012

Marc says it like it is

Marc Faber:
"It's difficult to tell where the market will go from here because we have so much manipulation. It's money printing versus weaker corporate earnings."
"I'm surprised. On the re-election of Mr. Obama, I would have thought the market should be down at least 50%. Mr. Obama is a disaster for business, a disaster for the United States. Not that Mr. Romney would be much better.
But I think the Republicans understand the problem of excessive debt better than Mr. Obama, who basically doesn't care about piling up debt. And in the background you have Mr. Bernanke, who, with aritificially low interest rates, enables the debt to escalate ENDLESSLY!"
Comment: The better liar won. Who wants the truth anyway?

Thursday, November 8, 2012

The Economics of the Fiscal Cliff

The Economics of the Fiscal Cliff

Thursday, November 1, 2012

Storm warning for your money wealth

Storm Warning for your Money Wealth

Over the past decades financial markets have been inundated by an avalanche of liquidity and the financial sector has grown into its current gigantic proportions. This growth of the financial sector has been built on the expansion of debt. Now that debt expansion has reached its limit, the boom has turned into a bust.

The Debt Trap

Debt accumulation tends to move in an exponential form. This means that the accumulation starts slowly and over a long period of time. Most of the time it seems as if the debt burden were well under control.
At the beginning of long debt cycles existing debt is small by definition while debt capacity is large. Filling this space between the current actual debt level and potential debt constitutes a temptation which is often hard to resist for potential borrowers. Yet debt accumulation implies that a rising debt level diminishes debt capacity at the same pace as debt grows. At the end of the cycle, when the debt crisis has arrived, the borrower is squeezed from both sides.
The following graph (figure 1) shows the mechanism of the debt trap
Figure 1 - The Debt Trap
credit worthiness
While in the beginning there is space to borrow and the two curves merge only slowly, they finally snap almost abruptly at the end of debt cycle. At the beginning, at point A, debt capacity is at its maximum with actual current debt at its minimum. Even after half of the way of the debt cycle has been taken (point B), current debt is still low and debt capacity is still high. Yet ongoing debt accumulation means that an ever larger portion of the newly contracted debt will go into interest payments. Even if the borrower would stop spending at this point, debt would still rise because of the interest to pay. From point B onwards to the end point at C, the erosion of debt capacity accelerates while debt rises rapidly. Beyond the closing of the debt trap, at the right side of C, debt capacity is negative. The borrower has no longer access to new loans. Voluntary austerity is no longer an option at this point, it has become a necessity.

Government Debt

As long as debt levels are low and the perceived debt capacity of government is high, debt accumulation can run smoothly and go on without much disturbance. During the phase of the easy ride of debt expansion large parts of the population tend to perceive government expenditures as a net benefit. Government debt itself has its counterpart in the form of assets in the accounts of the financial system and as financial wealth in the balance sheet of the savers. Debt accumulation by the government feeds the expansion of the financial sector and augments the financial wealth of the private sector.
Financing government is a lucrative business. Commercial banks borrow money from their central bank at a low rate and buy government bonds with higher yields. Investment banks make money as intermediaries between private investors and governments. Additionally, the financial sector will expand with the growth of public debt by setting up investment funds for the small private investor. Investment for life insurers becomes a no-brainer as long as they can stock up on apparently save government debt. Government bonds are deemed to be the safest investment because the state is the last to go bankrupt given that the government has authority over its monetary regime.
This idyllic situation when government debt is still low does radically change when government is getting close to its debt capacity. Then expansionary fiscal policies tend to work in reverse and monetary policy reaches a dead end. The most massive stimuli only achieve that the system does not implode right away. Investors panic when they learn that government bonds are not risk-free assets.

Monetization of Debt

With the approach of the debt crisis, central banks experience their epitome as agents of safeguarding the major players of the financial system along with the government. In order to prevent default by the government and to help financial markets institutions to stay afloat, central banks will create fresh money through the purchase of assets from financial market institutions which in return will deposit this newly acquired cash with the central bank itself. This way the central bank pumps liquidity into the system.
The expansion of the central bank’s balance sheet is the mirror image of the creation of central bank money, the so-called monetary base with most of the newly created money now held by the financial sector in the form of excess reserves. Excess reserves are cash holdings that banks do not need in order to fulfill their minimum reserve requirements. Before the current financial crises commercial banks held excess reserves at their minimum at or close to zero. Now these holdings amount to $1.4 trillion (chart 1).
Chart 1 - Excess Reserves of the US Banking System
excess reserves depository institutions
Even in the case that financial institutions and the government were actually insolvent, this policy provides them with liquidity and they can maintain their ability to pay. Commercial banks and other major financial institution can get rid of their bad assets and load them upon the central bank. While financial market players get cleansed this way, the central bank picks up the dirt. In the end it will be the tax payer who has to pay the bill. The main purpose of quantitative easing is to help that the banking sector will stay afloat and prevent government from defaulting.
As of now the unprecedented size of monetization of debt has not yet led to rates of inflation commensurate with the monetary expansion. Yet all it takes to make this bomb go off is a somewhat more pronounced price inflation rate that is high enough to trigger greater inflationary expectations. With higher inflationary expectation the financial system will get into a state of feedback that is the opposite of the present situation. While at the moment the multiplier and the velocity of money are low, these variables will rise drastically in the face of rising inflationary expectations. At this stage the debt cycle moves into its final stage as purely monetary phenomenon. When price inflation begins to pick up, the mass of base money which central banks have supplied no longer serves mainly as a cushion to safeguard the banks but turns into financial dynamite that will detonate into uncontrollable monetary expansion. The end stage of the debt cycle takes place as a socio-pathological frenzy to spend as fast and as much as anyone can. Having stacks of liquidity at their disposal mammoth proportions of lending can take place. As soon as the price inflation rate will pick up significantly, more borrowing will occur and when expectations change to anticipate higher prices in the future, a rush to borrow will happen. Once inflationary expectations take hold, it would take drastic increases of the interest rate. One may safely bet that central bankers will be too timid to raise interest rates high enough in order to curb inflation in time out of fear to push back the economy into recession again.
When a debt crisis occurs the financial sector comes under pressure and the national central bank will come to its rescue as it is the mission of central banking. Central banks have the ability to monetize debt by buying government bonds and other debt instruments. Banks can get rid of bad assets in return of fresh money which the central bank can create at will. In its early stage this policy of monetization of debt need not lead to price inflation. When lending is still subdued the monetary base stays with the commercial banks and does not yet enter the real economy. This will change when inflationary expectations are on the rise. The ensuing spending frenzy could only be curbed by massive increases of the interest rate. One can make a pretty sure bet that central bankers will hesitate until it is too late to bring down price inflation in time.

About Antony P Mueller