Every year, friend-of-the-site David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It's quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam
“The easiest thing to do on earth is not write.”
~William Goldman, novelist
I never would have believed it—not in a million years—but it happened: the Cubs won the World Series, and The Donald is our new president. Every December, I write a Year in Review1 that’s first posted on Chris Martenson’s & Adam Taggart's website Peak Prosperity2 and later at Zero Hedge.3 What started as a few thoughts posted to a handful of wingnuts on Doug Noland’s Prudent Bear message board has mutated into a detailed account of the year’s events. Why write this beast? For me, it puts the seemingly disconnected events that pass through my consciousness, soon to be lost forever, into a more organized and durable form. Somebody said I should write a book. I just did. In a nutshell, this is a story of human follies and bizarre events. There are always plenty of those. Let others tell the feel-good stories.
Figure 1. Malcolm McDowell as Alex in A Clockwork Orange.
I try to identify themes that evolve. This year’s theme was obviously defined by the election, which posed a real problem. I struggled to detect the signals through the noise. Many of my favorite analysts from whom I extract wisdom and pinch cool ideas spent the year trying to convince the world that one or more of the presidential candidates was an unspeakable wretch. I was groping for a metaphor to capture our shared experiences, rummaging through Quentin Tarantino scripts and Hieronymus Bosch landscapes for inspiration. “Rise of the Deplorables” was tempting. Then it clicked. The term “clockwork orange” is a Cockney phrase indicating a bizarre incident that appears normal on the surface. The phrase was commandeered as the title of a 1971 dystopian film in which Malcolm McDowell’s character Alex is brainwashed by being forced to watch the most grisly and horrifying of spectacles (Figure 1). For us, it was the 2016 presidential election, which created a global mind-purging brain enema. The horror! The horror! (Oops. Wrong movie.)
I knew in January that by mid-November we would be unified by our collective distrust of the Leader of the Free World, who would be surrounded by a dozen chalk outlines corresponding to political corpses that nobody wished to resurrect. I have done my best to not marinate you—too much—in tales of sociopathic felons or stumpy-fingered, combed-over letches. I do, however, eventually enter the Swamp.
By way of introduction, my lack of credentials—I am an organic chemist—has not precluded cameos in the Wall Street Journal,4 the Guardian,5 Russia Today,6,7,8 a plethora of podcasts,1 and even a couple investment conference talks. Casting any pretense of humble bragging aside, let’s just post this year’s elevator résumé and a few endorsements to talk my book.
“We live in a world where some of the best commentary on the global financial markets comes from a frustrated chemistry professor.”
~Catherine Austin Fitts, former Assistant Secretary of Housing, former Dillon, Reed & Co., and current president of Solari9
One of the high-water marks was sharing the spotlight with Mark Cuban in a Wall Street Journal article by Ben Eisen on nouveau gold buggery:10
“Dave Collum . . . has been adding to his holdings of physical gold this month, citing, among his concerns, negative interest rates and the growing refugee crisis in Europe. ‘I’m getting apocalyptic,’ he said.”
~Ben Eisen, Wall Street Journal
Podcasts in 2016 included Wall St. for Main St.,11 Macro Tourist Hour (BTFD.TV),12 The Kunstlercast,13 Five Good Questions,14 FXStreet,15 and, of course, Peak Prosperity.16 Dorsey Kindler, of a small-town newspaper, the Intelligencer (Doylestown, PA), interviewed me about college in an article titled, “The New McCarthyism” and, in an ironic twist, was soon thereafter fired and his content purged.1 An interview for the Cornell Review, a right-wing student newspaper considered a “rag” by the liberal elite, probed college life and the new activism.17 A cross-posting at Zero Hedge got the Review’s click counts soaring.18 Finally, I chatted on local radio about real estate, the bond market, Hillary, and other rapidly depreciating assets.19
“If you reflect on Prof. Collum’s annual [review], you will realize how far removed from the real world and markets you are. This is a huge deficiency that all of you must work on correcting.”
~Professor Steve Hanke, economist at Johns Hopkins University, in a letter to his students
Footnotes appear as superscripts with hyperlinks in the Links section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts via the linked contents as follows:
- Background: The Author
- On Conspiracy Theorizing
- U.S. Economy
- Broken Markets
- Cash on the Sidelines
- Pharma Phuckups
- Real Estate
- The Bond Caldera
- ZIRP and NIRP
- War on Cash
- Banks and Bankers
- The Fed
- European Central Bankers
- Refugee Crisis
- References Part 1
- Putin and Russia
- South America
- Middle East
- Government Folly
- Human Achievement
- Human Folly
- Civil Liberties
- Campus Politics
- Rigged Primaries: RNC Division
- Rigged Primaries: DNC Division
- Hillary Clinton
- References Part 2
For historical reasons, the review begins with a survey of my perennial efforts to fight the Fed. I am a fan of the Austrian business cycle theory and remain hunkered down in a cash-rich and hard-asset-laden Bunker of Doom (portfolio). The bulk of the review, however, is really not about bulls versus bears but rather human folly. The links are as comprehensive as time allows. Some are flagged as “must see,” which is true only for the most compulsive readers. The quote porn is voluminous: I like capturing people’s thoughts in their own voices while they do the intellectual heavy lifting.
I try to avoid themes covered amply in previous reviews. Some topics resolve themselves. Actually, none ever do, but they do get boring after a while. Others reappear with little warning. Owing largely to central banking largesse, the system is so displaced from equilibrium that something simply has to give, but I say that every year. We seem to remain on the cusp of a recession and the third, and hopefully final, leg of a secular bear market that began in 2000. Overt interventions have kept the walking dead walking. The bulls call the bears Chicken Littles and remind us what didn’t happen. One of my favorite gurus reminds us of a subtle linguistic distinction:
“Didn’t is not the same as hasn’t.”
~Grant Williams, RealVision and Vulpes Investment Management
I finish with synopses of books I’ve read this year. They are not all great, but my limited bandwidth demands selectivity . They are all nonfiction (to varying degrees). I don’t have time to waste on 50 Shades of Garbage.
"As for the national press corps—the Fourth Estate—it has been compromised, its credibility crippled, as some of the greatest of the press institutions have nakedly shilled for the regime candidate, while others have been exposed as propagandists or corrupt collaborators posturing as objective reporters."
~Pat Buchanan, syndicated columnist and senior advisor to presidents
With some notable exceptions, the mainstream media has degenerated into a steaming heap of detritus that is so bad now that it gets its own section. A congenital infobesity has morphed into late-stage disinfobesity. Enter social media—the fever swamp—to fill the void. As we shall see, however, all is not well there either. I sift and pan, looking for shiny nuggets of content that reach the high standards of a rant. Shout-outs to bloggers would have to include Michael Krieger, Charles Hugh Smith, Peter Boockvar, Bill Fleckenstein, Doug Noland, Jesse Felder, Tony Greer, Mike Lebowitz, Mish Shedlock, Charles Hugh Smith, and Grant Williams. News consolidators and new-era media include Contra Corner,20 Real Vision,21 Heatstreet,22 and Automatic Earth.23 A carefully honed Twitter feed is a window to the world and the road to perdition. My actions speak to my enthusiasm for Chris Martenson and Adam Taggart at Peak Prosperity.24 However, if you gave me one lens through which to view the world, I would have to choose Zero Hedge (or maybe LadySonya.com).
“You really should be keeping a journal because you are living through momentous times.”
~Chris Martenson, Peak Prosperity
“I stopped believing in coincidences this year.”
~Scott Adams, creator of Dilbert
Every year I shout out to conspiracy theorists around the world. I am not talking about abductions by almond-eyed aliens with weaponized anal probes (which really hurt, I hasten to add) but rather the simple notion that sociopathic men and women of wealth and power conspire. Folks who could get through 2016 without realizing this are imbeciles. I am talking totally blithering idiots. Markets are rigged. Government stats are cooked. Interest rates are set by fiat. Polls are skewed. E-mails are destroyed. Cover-ups abound. Everybody has an agenda. Watch this d-bag at one of the neocon think tanks—somehow so stupid as to not realize he’s being recorded—talk about how false-flag operations are commonplace.25 Meanwhile, the media conspires to convince us to the contrary. The folks who really piss me off, however, are the glib intellectuals—Nassim Taleb calls them “intellectuals yet idiots” (IYIs)—who suggest that conspiracy theorists are total ret*rds.26 (Saved by the asterisk, which baffles the sh*t outta me why that works.) Does it seem odd that the world’s most prominent detractor of conspiracy loons, Harvardian Cass Sunstein,27 is married to neocon Samantha Power,28 one of the great conspirers? It does to me, but I am susceptible to such dietrologie.
“Popular opinions, on subjects not palpable to sense, are often true, but seldom or never the whole truth.”
~John Stuart Mill
Many will try to shut down open discussions of ideas displaced from the norm by using the word “conspiracy” pejoratively. Their desire for the world to be normal is an oddly child-like cognitive dissonance. In that event, lean over and whisper in their ears, “Keep your cognitive dissonance to yourself, dickweed” while gently nudging them in the groin with your knee. Now, let’s pop a few Tic Tacs, grab a clowder, and get on with the plot, but first . . .
*Trigger Warning* If this review is already too raw for your sensibilities, please stop reading. Nobody is making you squander your time on a socially marginal tome of questionable merit. Better yet, seek professional help.
“If you pay well above the historical mean for assets, you will get returns well below the historical mean.”
~Paraphrased John Hussman
Read that over and over until you understand it. Changes in my 2016 portfolio were more abrupt than those from other years but still incremental. I resumed purchasing physical gold in 2015 after a decade-long hiatus. In 2016, I bought aggressively in January (the equivalent of half an annual salary) and continued incremental buying throughout the year (another half salary). My total tonnage (OK, poundage) increased by an additional 5% of my assets. My cash position shrunk by about 5% accordingly but remains my largest holding. I am in no rush to alter the cash position. For a dozen years, I have been splitting my retirement contributions into equal portions cash and natural gas equities. The latter keeps failing to attain an approximate percentage goal of 25–30% of my assets owing to market forces. My approximate positions are as follows:
Precious metals etc.: 27%
Cash equivalent (short term): 53%
Standard equities: 8%
The S&P, despite a late year rally incorrectly attributed to the Trump victory, appears to be running on fumes or, as the big guns say, is topping. The smart guys (hedge fund managers) continue to underperform, which means the dumb money must be overachieving (blind nuts finding squirrels). This is never a good sign.
“We should all own cash, because it is the most hated asset.”
~Jim Rogers, Rogers Holdings and Beeland Interests
“The great financial success stories are people who had cash to buy at the bottom.”
~Russell Napier, author of Anatomy of the Great Bear (2007)
“Cash combined with courage in a time of crisis is priceless.”
~Warren Buffett, Berkshire Hathaway
Figure 2. Performances of GLD, SLV, XAU, XLE, XNG, and S&P.
After a few years of underperformance resulting from the oil and gold drubbing, large gains in the gold equities (60%), gold (6%), silver (15%), generalized energy equities (10%), and natural gas equities (48%) shown in Figure 2 were attenuated by the huge cash position to produce a net overall gain in net worth of 9%. This compares to the S&P 500 (+10% thanks to a hellacious late year rally) and Berkshire Hathaway (25%, wow). (Before you start brain shaming me, that same cash buffer precluded serious percentage losses during the hard-asset beatings in the preceding years.)
The most disappointing feature of the year was in the category of personal savings. I have managed net savings every year, including those that included paying for college educations. This year, however, began poorly when my gold dealer got robbed and lost my gold. My losses paled in comparison to his; he committed suicide. I discovered maintenance needs on my house that got really outta control, and a boomerang adult child ended up costing me a bit. All told, I forked over 50% of my annual salary to these unforseeables, which turned overall savings negative (–20% of my salary) and eroded a still-decent annual gain in net worth. Oh well, at least I have my health. Just kidding. I have a 4 centimeter aortic aneurysm, am pissing sand, and have mutated into Halfsquatch owing to congenital lymphedema (Figure 3). (I live-Tweeted a cystoscopy—likely a first for social media.) I have to keep moving here to finish before I pass my expiration date.
Figure 3. Sand and Stump.
In a longer-term view, large gains in total net worth (>300%) since January 1, 2000 are still fine. I remain a nervous secular precious metal bull and confident equity secular bear. I intend to put the cash to work when Tobin’s Q, price-to-GDP, price-to-book, and Shiller PE regress to and through the mean. When this will occur is anybody’s guess, especially with central bankers determined to make me pay for “fighting the Fed.” I will start buying after a 40% correction brings the S&P to fair value, keep buying as it drops below fair value, and wish I had saved my money by the secular bottom. We return to all this in Broken Markets.
Here’s what my dad taught me: you need cash at the bottom to buy up cheap assets. Few will have cash because you have to go to cash at the top, and precious few have the capacity to shake recency bias and exit positions that have performed well. Just like a toaster, your sell order has only two settings: too soon and too late. My far greater concern is that bear markets are as much about time as they are about inflation-adjusted price. The Fed is determined to burn the clock. Nobody wins if we imitate Japan’s 25-year lost decade.
“Time takes everybody out. It’s undefeated.”
“The word ‘maximum employment’ has this connotation that everything is good in the labor market, but everything is not great in the labor market."
~Loretta Mester, president of the Cleveland Federal Reserve
Unemployment is at 4.9%—what’s not to like? Economists have even claimed the “labor market is getting tight.” I scoff. The labor participation rate shows that 38% of working-age adults are not working (Figure 4). Apparently, 33% of working-age adults are neither employed nor unemployed. Hmmm . . . even that’s a little optimistic given that only 50% of adults are employed full-time. The millennials are getting whacked by the boomers who refuse to die (sorry, retire).
Figure 4. Unemployment (left; official stats in red; Shadowstats in blue) and labor force participation rate (right).
The wealth for middle-class households has dropped 30% since 2000;29 One in five kids lives in poverty,30 46 million folks are on food stamps;31 20% of the families have nobody employed32 (despite the 4.9% number); and almost 50% of all 25-year-olds are living with mom and dad unable to translate that self-exploration major into a job.33 Half of all American workers make less than $30,000 a year.34 The once-industrial-juggernaut Rochester of Kodak/Xerox fame has more than 30% of residents living in poverty and another 30% living with government assistance.35 Very Detroit-like but without the Aleppo motif.
You can see it in the micro if you drill down. Deindustrialization has been occurring steadily since the late 90s.36 The mining industry lost more this year than it made in the last eight years.37 Sales of industrial-strength trucks have been “dropping precipitously.”38 Sales in general are looking very ’09-ish. Factory orders and freight shipping (Cass Freight Index) have been dropping for two years.39 Catherine Mann of the OECD says that “In terms of actual trade growth, it is extremely grim.” The CEO of Caterpillar finally cashed in his chips after 45 contiguous months of dropping sales.40 Commercial bankruptcies are up 38% year over year,41 whereas 62% of Americans have less than $1,000 in savings.42 It seems unlikely the consumer will be buying bulldozers and 18 wheelers in the near future.
“This turns out to be the deepest and most protracted growth shortfall on record for the modern-day global economy.”
~Stephen Roach, Yale professor and former chairman and chief economist at Morgan Stanley
The economy is in the weakest post-recession recovery in half a century despite protestations to the contrary by Team Obama.43 The 2%-ish growth rate since ‘09 feels like a recession, especially given specious inflation adjustments to get 2%. There isn’t a wave of job cuts yet, but some signs are worrisome. Cisco Systems laid off 20% of its workforce.44 GE cut 6,500 jobs.45 Despite gains in non-GAAP earnings, GE’s GAAP earnings—the non-fabricated earnings—plunged.46 Intel dumped 11% of its workforce but faked a win by dropping its assumed tax rate by 7%.47 This tactic smacks of the same old financial engineering, but maybe it is headed for nonprofit status. One bright spot: the $15 billion vibrator industry is set to grow to $50 billion,48 satisfying consumers in a manufacturing–service industry combo.
Speaking of stimulus, what the hell went awry? The Feds drilled the rates to zero (creating a ginormous bond bubble; vide infra) to encourage consumers to do the one thing they cannot afford to do—consume. Global central bankers have cut rates every 3 days since 2008 according to Grant Williams.49 The central bankers dumped tens of trillions of dollars—trillions with a “t” that comes right before gazillions with a “g”—into the global economy. The answer is simple and foreshadowed above: once you blow up a credit bubble, you cannot force consumers to spend. Have ya heard people talking about pulling equity out of their houses lately? Didn’t think so. That numbnut idea proferred by the incoherent Alan Greenspan left consumers with the same houses and twice the debt while poverty-stricken old age looms large.
“If a consumer buys a boat today with money made available through a low-interest loan, that’s a boat he won’t buy next year.”
~Howard Marks, Oaktree Capital and Three Comma Club (billionaire)
“The decline of the middle class is causing even more economic damage than we realized.”
~Larry Summers, speaking for himself with the royal “we”
How could the economists have been so wrong? I have a remarkably simple theory: their models are wrong. They suffer so badly from Friedrich Hayek’s “fatal conceit” that they have become functional nitwits. That’s the best I’ve got. One could argue we have a secular economic problem. As a nation, we exploited cheap labor overseas through immigration during the 16th–20th centuries. The immigrants worked like dogs, got paid squat, and saved so furiously that it became a lot more than squat. Thomas Sowell explains this brilliantly in his writings.50 For the last few decades, however, we exploited cheap overseas labor by exporting jobs. They too worked like dogs, got paid squat, and saved furiously. But that wealth is not here; it’s over there (pointing east). Will new and improved trade policies solve our (U.S.) problems? I don’t think so. As long as there are folks overseas willing to work harder for less, we have some correcting left to do. With that said, I am a free-trade guy and particularly like the trade agreement painstakingly crafted by Mish Shedlock:
“Effective immediately, all tariffs and subsidies, on all goods and services, are removed.”
~Mish Shedlock (@MishGEA), blogger
How about some more Keynesianism? Former economist Paul Krugman, whose op-eds read like episodes of Drunk History, would say we simply haven’t done enough. (Paul: you have done more than enough.) Modern-day Keynesianism has mutated way past Maynard’s original idea into an unrecognizable metaphysical glob of thinking that boils down to the notion that government knows how to spend better than the private sector does. Is this the same government that included Anthony Weiner, Rick Santorum, and Barbara Boxer?
Here is Keynesianism I could live with. Government should spend as little as possible, but there are legitimate roles to be played. Imagine if governments at all levels would simply act like financially interested parties—as a collective, not as slovenly greedy, bribery-prone individuals—and buy necessary goods and services when they are cheap and stop buying when the private sector has bid them up. We would get maximum bang for the tax buck. It would also quite naturally achieve the much ballyhooed counter-cyclicality. But, alas, the moment they start talking “stimulus,” the pay-to-play crowd turns it into a fiasco. As my dad once said, “Never ask government to do anything they don’t have to do, because they will do a terrible job.” Words from the wise.
“I don't think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention.”
~Axel Weber, former head of the Bundesbank
“My thesis now is that central banks believe they can prop up asset prices through a downturn in the business cycle.”
Whomever @TheEuchre is, I think that is a provocative alternative theory of Fed motivation. Moving along, we seemed to be on the cusp of a recession last year with a number of valuation indicators pointing to a +40% correction simply to regress to the mean. In the absence of such a correction (check) and the absence of explosive growth (check), we are still looking over the precipice (check). Luminaries like Stanley Druckenmiller, George Soros, Sam Zell, and Bill Gross are calling for a zombie apocalypse at some unknowable future date. Paul Tudor Jones appears to be wrapping up in a way that smacks of Julian Robertson’s Tiger Management hedge fund liquidation in ’99. Harvard’s Martin Feldstein says asset prices are “dramatically out of line.” Credit Suisse sees analogies to the tech bubble, whereas Ned Davis Research suggests, “on a revenue basis, U.S. stocks are as expensive as they have ever been.” Chart guru Doug Short created a simple model that averages four common equity valuation techniques (Figure 5). Based on his analysis, the market is 76% overvalued compared with the average dating back to 1900. (Note: a 76% overvaluation is regressed to the mean by a 43% correction, which will be as pleasant as baptizing a cat.)
Figure 5. Doug Short composite valuation model.
At these valuations, a few shanks at the start of the year were scary, but soon the markets entered the tightest 40-day trading range (2.27%) in more than 100 years—the Horse Latitudes.51 There were a few goofy IPO crack-ups but they stayed subclinical. Even flash crashes raised only a few eyebrows. Knee-slappers elsewhere included a crash of the British pound in the forex markets in under a minute owing to Brexiteers52 (vide infra) and a 6.7% crash in China in less than a minute.53 The misnamed Trump rally—misnamed because it began three days before the election—left some serious skid marks, elevating the market 8% in only a few weeks. This was a short squeeze in conjunction with . . . I don’t really know.
It is suggested that central banks and programmed investing have pushed a wall of money at the markets. This credit-based splooge corresponds to debts to be paid back later, but who cares? Over 10,000 mutual funds and exchange-traded funds (ETFs) are feeding off only 2,800 issues on the NYSE. There are now almost twice as many hedge funds as there are Taco Bells54 (which won’t be growing under a Trump presidency). I get a little confused as reported outflows in both equity funds and money market funds argue the contrary. (Even these claims are confusing given that buyers necessarily match sellers; vide infra.)
“[I]t’s monetary policy we demonstrate is driving everything. And yet here too, there are worrying signs of what may become a breakdown."
~Matt King, Citigroup
Stock buybacks—in many cases leveraged stock buybacks—continue to levitate the markets. For those not paying attention, companies borrow money to buy back shares to prop up share prices, which serves the dual role of maximizing year-end bonuses and wards off balance sheet crises. Now my head hurts. Baker Hughes announced a $1.5 billion share buyback and $1 billion of debt issue. In the first half of 2016, S&P 500 companies “returned” 112% of their earnings through buybacks and dividends.55 Returned? There is some evidence that buybacks may be subsiding. When they stop buying shares at all-time highs—“buying high”—and their investment unwinds while crushing corporate debt persists, companies will be doing “dilutive share issuance” at fire sale prices—“selling low.” For now, corporate balance sheets hold the dumb money.
“The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins and growing indebtedness.”
~Stanley Druckenmiller, former head of Duquesne Capital and rock star
There are instances of generic idiocy emblematic of deep problems. Eighty-five percent of traders on Wall Street have less than 15 years of experience. Synthetic securitizations are returning.56 Are buyers being paid for the risk? Some have suggested that retail investors should stay away from these (and Fukushima). A managed futures fund was launched by a 17-year-old kid who may not have made it to third base yet.57 A 28-year-old Ukrainian hacker got caught making over $30 million on insider information.58 If he were a bank, he’d have been fined $100K. The “head” of the collapsed Visium Asset Management hedge fund killed himself by slicing his own neck.59 Right. Platinum Partners appears to have been running a Ponzi scheme.60 Vegan food start-up Hampton Creek used $90 million in “seed” money to buy its own products (probably seeds) to generate fake “organic growth.”61 Nintendo spiked on the release of Pokémon, which caused hoards of idiots to chase digital critters to stupid places.62 Even though Nintendo fessed up that their bottom line would not be improved by the craze, some of the gains have stuck as investors keep chasing those digital share prices to stupid places.
“Markets don’t have a purpose any more—they just reflect whatever central planners want them to. Why wouldn’t it lead to the biggest collapse? My strategy doesn’t require that I’m right about the likelihood of that scenario. Logic dictates to me that it’s inevitable.”
~Mark Spitznagel, Universa Investments
“Preliminary attempts to clean it up fail as they only transfer the mess elsewhere.”
~Wikipedia on the bathtub ring in The Cat in the Hat
In 2011, I used that quote in a different context, but it is a great articulation of the Law of Conservation of Mass.63 There are a lot of memes in the investing community—pithy phrases and ideas for which tangible support is weak or nonexistent. One is the merits of “cash on the sidelines” and its kissing cousin, money “flowing” in and out of asset classes. In the late ‘90s, I tried to ascertain how much cash was generated in sell-offs and soon realized the answer was zero. Others such as Lance Roberts,64 John Hussman,65 Cliff Asness,66 and Mish Shedlock67 have dismembered putty-headed thinking underlying cash on the sidelines. However, there are pockets of holdouts (mostly on CNBC) who subscribe to the flow model. You can hear Maria saying it: “There is so much cash on the sidelines waiting to go into equities.” I am going to take one last crack at it with the aid of some graphical wizardry and grotesque oversimplification.
“So if money is coming into the market, where is it going to find a home?…What’s going to get it into the market?”
~CNBC Fast Money
Here is the problem with the meme in a nutshell: If I buy, somebody must sell. It’s the Law of Conservation of Cash. If I grab a stack of Tubmans ($20 bills) and buy NFLX, the former owner of NFLX now has the Tubmans, and I have the overpriced shares. Do that all day long, and the cash on the sidelines doesn’t change; it moves around like the bathtub ring. Mutual funds insert middlemen to skim cash, but still no money is destroyed or created. Breathless claims that money is flowing in or out of mutual funds sounds important, but where in this model is cash created or destroyed? The percentage of cash, however, is a huge issue.
Let’s look at this graphically and restrict it to a simple binary model (Figure 6). Imagine there is $100 trillion in cash globally and $100 trillion of market cap in equities. Of course different investors have different allocations, but investors have collectively decided that they wish to own 50% cash and 50% equities (labeled 50:50).
Figure 6. Equity-to-cash allocations in a non-inflationary world.
In a non-inflationary banking system, the cash is static. Along comes legendary wise man John Bogle declaring equities reward risk taking, we should weight our portfolios 60:40, and the world agrees. Investors will bid up equities to higher valuations until, collectively, equities reach the 60:40 proportion for a satisfying 50% gain exclusively through expansion of the numerator. Legendary raging bull Laszlo Birinyi, guided by recency bias, convinces the world stocks are great investments and suggests 80:20 as the right allocation. Investors collectively agree, and they bid shares higher, which completes an overall 300% equity gain from the conservative days of 50:50 allocations. Now we’re rocking! We are just beginning to pull stupidity forward. Jeremy Siegel, self-appointed guru and demagogue, says you simply can’t lose, so you should be 90% stocks, and the world listens because this particular baitfish-smart analyst stays at Holiday Inns and is from Yale! The market has now lost all moorings, pushing the overall gains to 800%! Of course, now cash is trash and investors strive to be 100% in equities. Equity investors now “reach out and touch the face of God” because the prices are heading for infinity. Alas, The Bear appears before that can happen—it always does. It doesn't have to be an axle-breaking speed bump. The proximate trigger is not important. Spooked investors drop their allocations back to 60:40 and, in the depths of despair, back to 50:50. You will then scoop up cheap equities with inverted baggies from disembowled, toe-tagged investors who need cash.
We gave the gains all back . . . or did we? During this round trip, society collectively learned to make goods and provide services much more efficiently. The same amount of effort—the same amount of cash—corresponds to a much higher standard of living. This is good deflation, the kind that James Grant describes because he reads the dusty archives from bygone eras. Most economists nowadays endorse low inflation that roughly matches productivity growth, which causes both the cash and the market cap (equities) to drift gently upward in a feel-good money illusion.68
Don’t we need inflation for growth? Only if you believe the industrial revolution of the nineteenth and early twentieth century was disappointing. For the first half of the twentieth century, the DOW rose 1.3% nominally per annum. However, the modern banking system is most definitely inflationary. Money is created by increased leverage of all kinds—sovereign debt, consumer debt, quantitative easing (QE), and helicopter money all grow the money supply. They grow the denominator (cash) in Figure 6, which is inflation. The overarching model guiding the Fed’s policies seems to be that increasing the denominator will nonlinearly increase the numerator. As inflation lifts equities, animal spirits take hold (the Wealth Effect) and lift them even more. We will go through the four stages of bullishness: Bogle-Birinyi-Siegel-God. The gains will be illusory because real wealth is manufactured, farmed, mined, and maybe programmed. Central bankers will always do something; sitting on their hands (or thumbs) is unnatural. When the markets de-lever, however, cash leaves the system. Business and investing models demanding inflation begin to break. This is bad deflation. It is harsh, abrupt, and dreaded by central bankers, because it is largely their doing.
“If you think health care is expensive now, wait until you see what it costs when it’s free.”
~P. J. O’Rourke, conservative columnist
There seemed to be an epidemic of flatliners in the pharmaceutical industry requiring quarantine (its own section). The big one was Theranos, a company based on miraculously effective lab tests that turned out not to really work.69 The company was quietly outsourcing to labs whose tests did work. When the scam was revealed, the wunderkind CEO, Elizabeth Holmes, watched her Forbes-estimated net worth drop from $4.5 billion in 2015 to “$0” in 2016.70 The corporate digital exam would be familiar to her distant relative John Holmes.
Mylan suffered an optics problem when the disappearance of a key competitor allowed it to take a cue from pharma scoundrel Martin Shkreli71 and jack up its EpiPen price 500%,72 which smacked of price gouging. Mylan was protected by government intervention when Teva was denied rights to make a competing product.73 Such mischief in the generic drug market is real. The feds also mandated stocking EpiPens in all schools.73 A million bucks of lobbying money well spent.74
An ode to my new EpiPen
It used to cost one, now it’s ten
Our merchants of greed
Are cheeky indeed
These grifters are at it again
Valeant Pharmaceuticals also reported big losses following big gains. Criminal investigations into Valeant took it 90% off its recent highs (a “tenth bagger”).75 Meanwhile, drug giant Eli Lilly’s share price Felt the Bern in the fall when Bernie Sanders tweeted concerns about the price of insulin rising 700% in 20 years.76 The big-cap drug scoundrels have also been accused of fabricating an ADHD epidemic and causing a global prescription drug addiction. A drum beat to restrain pain meds is getting very loud. Chronic pain patients watch with angst.
“Recovery is living long enough to die of something else.”
~Dr. Howard Wetsman (@addictiondocMD), chief medical officer, Townsend Addiction Treatment Centers
Oh, those bastards, right? Well, maybe not. I’m gonna take a crack at defending the industry. Mylan has been dead money for 20 years—zero percent return ex-dividends and ex-inflation. The same is true for Merck, Pfizer, Eli Lilly . . . I could go on. Former antimicrobial juggernauts Eli Lilly and Bristol-Myers Squibb are exiting the antibiotic market because they can’t pay the utility bills with the proceeds. You should worry.
“Drug corporations’ greed is unbelievable. Ariad has raised the price of a leukemia drug to almost $199,000 a year,”
~Bernie Sanders Tweet, dropping the shares 20% on the day
Where are all the revenues going? Really expensive research and development. Better meds make the world a better place. The life expectancies of AIDS patients with treatment are now three years below those of their uninfected peers. Wow. New-era cancer cures are off-the-charts effective. Pharma creates wealth in the purest sense and employs millions of people. On my consulting gigs, I can see researchers diligently trying to cure major diseases. Operationally, however, big-cap pharmas have been not-for-profit organizations for investors for several decades. When you see the prices get jacked up, don’t mindlessly assume it’s to line the pockets of management or investors.
It is claimed rather convincingly that the per-unit cost of health care has not risen, but the volume has soared. My stump/bladder sand /aneurysm mentioned above burned through a lot of health care. Why is health care so cheap elsewhere? My son broke his foot while in Vietnam weeks ago. X-rays, an MRI, surgery with titanium pins, and casting: $1,000. Three days in the hospital: $30 per day. Being invited to stay with the surgeon’s family for two weeks to convalesce: priceless. For a total of about $1,600, my son flew to Vietnam, got excellent surgery, and flew home. That is the essence of the rapidly growing medical tourism industry.
How is that possible? The doctor in Vietnam is not wealthy and probably demands few material goods. Torte reform is not needed because caveat emptor reigns. There might even be some Gates Foundation money thrown in. Most important, the profoundly expensive research and development was all done in developed countries and paid for by large revenue streams.
“It’s the craziest thing in the world.”
~Bill Clinton on Obamacare
“I am leaving the gold equity ‘buying opportunity of a lifetime’ . . . to others; my shrunken stash of equities is it for now. Maybe I just called the bottom.”
~David Collum, 2015 Year in Review
Nailed it! That was the bottom. I expect some checks in the mail from nouveau riche gold bugs who got 60% on their XAU-tracking investments. Despite weakness of late, the case for gold is now in place: European and Chinese banking risks, negative interest rates, a war on cash, and omnipresent risks of a hot war in the borderlands of the Middle East and Europe. Estimates suggest 0.3% of investors’ assets are in gold.77 Traditional portfolio theory recommends 5%, offering a better than 15-fold relative performance en route. (Recall that discussion of "flow" from above.)
Let’s check in on what some of the wingnuts on the fringe of society are chortling about now:
“The world’s central bankers are completely focused on debasing their currencies. If investor’s confidence in central bankers’ judgment continues to weaken, the effect on gold could be very powerful.”
~Paul Singer, Elliott Management Corp
Gillian Tett: “Do you think that gold is currently a good investment?
Greenspan: “Yes. Economists are good at equivocating, and, in this case, I did not equivocate.”
“I can understand why holding gold would seem to be a sensible part of a national portfolio. Because there is clearly a need to take some precautions against an unknowable future.”
~Mervyn King, former head of the Bank of England
"I am not selling gold."
~Jeff Gundlach, DoubleLine and the new “Bond King”
“The case for gold is not as a hedge against monetary disorder, because we have monetary disorder, but rather an investment in monetary disorder.”
~James Grant, Founder of Grant’s Interest Rate Observer
“Everyone should be in gold.”
~Jose Canseco, expert on performance enhancement
James Grant also went on to say that “gold is like a monetary tonsil,” leading some to speculate that his son, Charley (WSJ), slipped him a pot brownie. Let’s see if we can get the goofs too.
We’ll begin by blowing out a few ideas I do not subscribe to. I keep hearing from smart guys that gold is in short supply in the Comex or Shanghai gold exchange, you name it. These stories almost never play out. I am also a huge fan of Rickards and Maloney, but the saying “gold is money” and the notion that its price is actually the movement of the value of the dollar don’t work for me: prices of everything I buy follow the dollar, not gold, on the currency timescales. On long timescales, their assertion may be correct. Someday their assertion may even be correct on short timescales, but that isn’t right now.
What a year: I got as many electoral delegates as the bottom ten republican candidates combined, ate python, and own as much gold as the Central Bank of Canada. Per the Bank of Canada, it finished selling off all of its gold,78 probably to ensure that the U.S. didn’t attack. You think I jest? A WikiLeaked e-mail by Sid Blumenthal to Hillary Clinton revealed that France whacked Libya to make sure North Africa distanced itself from a gold dinar currency.79,80 Germany supposedly has half of its requested gold repatriated from the U.S. and France,81 which could be bullish or bearish on the half-full/half-empty logic. Venezuela repatriated 100 tons of gold a few years ago and was squeezed to sell it all back in the heat of a currency crisis.82 The Dutch depatriated their gold this year after repatriating it not long ago.83 The reasons are unclear. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, assured us Russia will continue to buy gold (Figure 7), presumably as a defense against interventions from inside the beltway. Of course, the Fed is silent on the “metal whose name shall never be spoken.”
Figure 7. Russian gold reserves.
In a shockingly quiet year given how much gold moved to the upside before the post-election monkey hammering, we probably should finish with some generic goofiness. On a few occasions, gold took the beatings that are familiar—huge futures dumps in the illiquid wee hours of the morning when no price-sensitive investor would ever consider selling. It dropped $30 in seconds late on the day before Thanksgiving when nobody was paying much attention. Another hammering came from a $2.25 billion sale84 and another $1.5 billion sale,85 both of which occurred in under 1 minute. Nanex concluded that the algo “gold spoofer” was at play,86 but the 2016 poundings were transitory and toothless compared with their brethren in 2011–2015. Trouble in the ETF market was revealed when BlackRock was overwhelmed by GLD buying.87 It was forced to create more shares in February than it had in a decade. I retain previously stated convictions that GLD is a scam—fractional-reserve gold banking. Deutsche Bank was overwhelmed by requests for physical gold.88 It tried to shake the hook by demanding that such a request must be made at a participating bank.89 Deutsche Bank, the location of the request, is not a participating bank? I imagine it doesn’t have the gold, consistent with its troubles outlined below. A Swedish precious metal vault got its payment mechanism terminated without explanation.90
We can’t close without talking about gold’s kissing cousin—silver. The silver market gets its share of muggings and sustained bashings, at times spanning several weeks. The silver sellers didn’t get full traction either, however, bringing silver off a 50% gain but leaving it up 15% year to date. Silver market treachery got some attention. The London Silver Fix—truth in advertising—at times deviated markedly from the spot price,91 causing consternation among those attempting to fix the price. Deutsche Bank agreed to settle litigation over allegations it illegally conspired with Scotiabank and HSBC Holdings to fix silver prices at the expense of investors.92 A class action suit against Scotiabank suggested that the conspiracy spanned 15 years.93 JPM was cleared of silver manipulation in three lawsuits—all dismissed with prejudice, an altogether different form of “fix.”94 The only remaining question is why they are stockpiling huge stashes of physical silver.95
I’m as sanguine as ever holding large precious metal positions. Gold bugs are reminded, however, of what a big victory will feel like:
“Our winnings will come . . . from the people who wake up one morning to find their savings have been devalued or bailed-in. . . . [I]t’s going to come from the pension funds of teachers and firefighters. The irony is that when gold finally pays off, it will not be a cause for celebration.”
~Brent Johnson, Santiago Capital
“Why Oil Prices Are About to Collapse”
~Headline from The Oil Drum in January, 2016
You could almost hear the bell ringing on that one. The price of oil promptly went on a 50% rip to the upside. Generally, however, energy was boring (to me) this year, but I keep investing in it. Of course, lower energy prices were hailed as great tax breaks for the consumer, ignoring those who say the economy drives commodity prices not vice versa. Like every other market, however, has been totally financialized. The supply/demand market got replaced with a casino-based futures market, and we know that casinos are trouble. Then there’s that whole petrodollar thingie wherein our alliances in the Middle East keep the dollar at reserve currency status and allow us to sell debt. It also seems to be the proximate cause for bombing vast numbers of Arab countries, but I’m ahead of myself.
A few corporation-specific problems gurgled to the surface. Chesapeake Energy got indicted for energy market manipulation, prompting the CEO to off himself in a one-car accident.96 He probably never realized it was a self-driving car (wink). Petrobras canned 11,700 workers.97 Norway’s sovereign wealth fund started tapping principle because Statoil got crushed.98 Statoil says it will pay a dividend . . . by issuing new shares.99 Maybe it should hire more petroleum engineers and fewer financial engineers. The world’s biggest developer (SunEdison) of the world’s most expensive energy (clean energy) had accrued $12 billion in debt after a two-year asset-buying binge. Liquidation revealed a complex web of Ponzi financing.100
Here’s a funny little nugget for intellectually molesting people at cocktail parties: Edward Longshanks outlawed the burning of coal in 1306 because of pollution. Apparently, Hillary was not the first to try to put a few coal miners out of jobs. Coal is truly hated, and the industry is getting annihilated by the switch to natural gas, which is getting annihilated by fracking-based oversupply.101 The mega-miner Arch Coal got oxidized in the energy rout, ironically leaving little residue.102 It’s probably time to invest in coal miners once the market’s beta corrects. (That’s code for a market-wide sell-off.) All of my ideas are contingent on a prefacing market drop in the throes of a recession. One will come like night follows day, and then the merits of cash will be unambiguous.
Energy companies getting whacked wouldn’t be so bad if it weren’t for the debt. Life insurers have huge energy-based junk bond exposure.103 Of course, the banks will allow them to hang on to greater risk by not calling in their chits rather than face reality. Zero Hedge reported that the Dallas Fed was telling banks not to push bankruptcy on energy companies.104 Denial by the Dallas Fed confirmed the story.105 (Thou doth protest too much.) Wells Fargo is committed to $72 billion if oil companies draw down their lines of credit,106 and that is just the beginning of its problems (vide infra). Wells Fargo, Bank of America, and JPM all have spiking numbers of bad energy-sector loans.107
I keep investing in energy, providing my own little Wall of Money to elevate the markets. In 20 years, I’ll know if it’s a smart move. A subset of this plan includes Russia, Iran, coal, and even uranium. Y’all can keep the new-fangled green energy; it’s too political for my tastes.
“Fossil fuels have saved more lives than any progressive cause in the history of the universe.”
~Greg Gutfeld, Fox News
“7:00 PM Sinkhole forms in San Francisco
7:01 PM Thirty-five people on wait list to rent sinkhole”
~Daniel Lin (@DLin71)
“House prices can’t be in a bubble because they are only 10% greater than the 2006 peak.”
Thank God the real estate bust is over. That got outta hand fast, but we’ve learned our lesson (sigh.) Of course, it’s not over, and we learned nothing durably. Stupidity doesn’t just rhyme; it repeats. I must confess that I’m unsure how they cleaned up the ’09 bust. Where did the massive inventory go? Some did the full cycle (ashes to ashes). I suspect that many former foreclosures are rentals (Figure 8). Although single-family rentals are a lousy business and represent a dangerous shadow inventory, soaring rental rates may actually make them profitable in the medium term. The authorities also didn’t really clean up the financial mess. Fannie Mae and Freddie Mac—the two toxic government sponsored enterprises (GSEs) that nearly destroyed us in ’09—are being considered for bailouts again.108 What? Didn’t we drive wooden stakes through their hearts? No. They got placed in the government protection program under the pseudonym Karen Anne Quinlan living on Maiden Lane.
Figure 8. Renter-occupied versus owned houses.
Some bubbles didn’t even burst in ’09. Vancouver real estate went bonkers with the influx of Chinese money. The cost of a single-family home in Vancouver surged a record 39% to $1.2 million by midsummer. Mansions were being bought and abandoned (Figure 9). Shacks (tear downs) were selling for millions. Thomas Davidoff, erudite professor at the University of British Columbia, noted, “These prices are getting pretty freaking nuts.”
Figure 9. Abandoned $17.5 mansion,109 $7.2 million mansion for sale,110 and $2.4 million starter home in Vancouver.
People were getting rich buying Vancouver houses, but I’ve seen this plot before and know the ending. With everybody on the same side of the boat (boot), it would soon be listing starboard. Is that a blow-off top in Figure 10? Not really. The authorities aggressively scuttled it with a 15% housing tax111 to “cool off the market” (real estate’s version of the ice bucket challenge.) Sales dropped 96% year over year while prices dropped 20% in the blink of an eye.112 Where’d the buyers go? Toronto!113 I suspect Vancouver will retrace a decade (or more) of gains.
Figure 10. Vancouver real estate prices 1977–2016. Blue is “detached” in so many ways.
Legendary real estate analyst Mark Hanson sees a few frothy domestic markets, too (Figure 11).114 Bloomberg reports that $0 down, 30-year, adjustable-rate, jumbo mortgages are being given to youngsters in Silicon Valley, all backed by stock options.115 The San Francisco Federal Credit Union calls the program POPPY, or Proud Ownership Purchase Program for You because, as Zero Hedge notes, “Steaming Pile of Shit” lacks panache.116 Alan Cohen, former Ithacan and current Florida county planner, told me the Florida real estate bubble was back and bloated. A $95 million tear down in Palm Beach was the sound of a bell ringing.117 Prices of luxury condo sales in Miami have been cut in half.118 A busting golf course bubble is causing problems in Florida and other sand states because the courses are embedded in neighborhoods.119 Smacks of time-share-like legal problems. Some may also recall that a Florida real estate bust prefaced the ’29 collapse.120 Even in New York City the market is softening, as is its bedroom community, Greenwich, CT.117 And $100 million condos are showing evidence of being overpriced.118 Whocouldanode. Aspen witnessed the largest drop—a double-black diamond "freefall"—in years.119
You want some entertainment? Check out this critique of the architectural wizardry behind the ever-popular MacMansion.120
Figure 11. Domestic real estate markets.
According to Christie’s International Real Estate, $100 million homes were piling up by mid-year.121 It appears that the UK market (especially London) may finally be softening or, as they say at Bloomberg, “tanking.”122 The largest property fund had to stop redemptions.123 Ironically, they’ll have to sell assets, which I’m sure won’t help the market as the virtuous cycle turns vicious. Prime properties have also dropped in Paris, Singapore, Moscow, and Dubai.124 Some say the global high-end market has completely stalled.125 Australia seems to remain in a bubble.126
You know the picnic is over for the commercial markets when the seven-story office building in Figure 12 gets stale on the market.127 The real estate bears have taken notice. (That was inexcusable.)
Figure 12. Office building in Cleveland, OH, getting stale.
“Every cycle in human history has ultimately come to an end. Credit-enhanced cycles come to worse ends than the normal kind.”
~Tad Rivelle, chief investment officer of fixed income at TCW Group
Federal debt has climbed 8% annually since 2000,128 but who cares because we have the reserve currency, can print the garbage at will, and are assured by the highest authorities that inflation is good and high inflation is even better. Meanwhile, friend and market maven Grant Williams has created a masterpiece of analysis of our debt problems.129 In the absence of a deflationary collapse, debt is reconciled to the downside at a geologic pace; it almost never happens. (Supposedly the Brits did it in the mid-nineteenth century.130) The problem is exacerbated by an inherently inflationary banking system that requires monotonically rising debt to survive. Where do you think the interest paid on savings comes from (when there is interest, that is)? Despite the current calm—possibly the eye of the storm—there are newsworthy events in the world of debt.
The consumer is stretched by having no savings and gobs of debt—huge net debt (Figure 13). An estimated 35% of Americans have debt that is more than 180 days past due.131 They are now buying used cars with 125% loans,132 presumably to cover the negative equity from their previous loan and help pay for repairs. The used car market is priced poorly owing to the overdeveloped credit machine created to sell the trade-ins from rentals.
Figure 13. Consumer debt (credit).
One of the most oppressive of all debts, high-interest credit card debt, now exceeds $16,000 per household.133 The $2500 per annum interest payments are a death spiral for the average consumer earning less than $30,000 per year. The collective tab is nearing $1 trillion.134 Larry Summers blames the high debt-to-income ratio for the stagnant consumer.135 He may be missing the superimposed realization that they have no pension either (vide infra).
“There’s a huge difference between having the money to buy something and being able to afford something.”
Non-dischargeable student loans continue to climb, now exceeding $1.3 trillion (Figure 14). Can anybody picture the millennials paying this off? A comprehensive White House report lays out the stark details.136 Student debt has grown linearly since ’09—suspiciously linearly. In fact, I don’t trust linearities like that:
“A 45-degree angle in finance means one thing—fraud.”
~Harry Markopoulos, Madoff whistleblower
I suspect that the federal government is using student loans as a monetary policy tool to methodically jam money into the system not unlike its bond-buying spree in which Andy Husar was instructed to buy $8 billion a day, every day, without fail. Curiously, the White House (metonymically speaking) thinks “student debt helps, not harms, the U.S. economy.” That idea reflects the IQ expected of a house.
Figure 14. Just student loans or monetary policy?
There are rumors of arrests of student debtors—Operation Anaconda.137 It sounds like Dickensian debtors’ prisons if true. I think it more likely that we are slowly heading toward some form of debt jubilee. It will be highly politicized and unfairly distributed. Hints of one come in the form of disability relief for almost 400,000 students who are said to be disabled but unable to prove it.138 If, however, ADHD or a damaged frontal cortex that allows one to spend $200,000 on an unmarketable education is a disability, 400,000 is an underestimate. Hillary publically promised to give free tuition to students while privately getting caught on a hot mic referring to the millennials’ hopes of free education as “delusional.”139 This point is now moot.
“Even with borrowing costs at or near their lowest ever, companies are increasingly unable to pay their debts.”
~Mark Gilbert (@ScouseView), Bloomberg
Corporate debt continues to give me fits as companies blow up their balance sheets to buy back shares and pay dividends. This is not self-extinguishing debt. You hear about corporate cash on balance sheets from the media. That cash is stored in metaphorical crocks, because the story is bogus. The top 1% of companies has 50% of the net cash on the balance sheets. (Kinda sounds like the wealth disparity pitch all over again, eh?) Apple, Microsoft, Google, Cisco, and Oracle account for 30% of it. The journalists squealing about “cash to be put to work” often fail to look at the net cash (cash minus debt). Total debt on the balance sheets doubled from $2.5 trillion in 2007 to over $5 trillion by early 2016 (Figure 15). That’s 7% per annum according to the 72 rule (interest rate x doubling time ≈ 72). Meanwhile the cash on the balance sheet rose by a paltry $600 billion. I get lost in the big numbers, but that is a $2 trillion rise in net debt. They’ve got to keep growing it, however, to buy back shares if they wish to prevent their share prices from collapsing.
Figure 15. Corporate debt.
Isn’t debt a zero-sum game? We owe it to ourselves? In a sense, yes. But when all this debt comes due, we will discover that our shiftless counterparty (us) doesn’t have any money. All that money you think you’ve saved is owed to the millions of people comprising “ourselves.” How much do we owe ourselves? Unfunded liabilities come to a total of $2 million per viable taxpayer ($200 trillion total). You know what you are owed, but do you know how much you owe to the rest of us? Got gold?
“It’s existential. . . . You can pull different levers, but the decline in rates is an existential problem for the entire pension system.”
~Alasdair Macdonald, Willis Towers Watson, an actuarial consultancy
Everybody passes pickles over the social security trust fund when, in fact, it doesn’t exist and never did. It is a mathematical certainty that we will default on our obligations, but it will occur in some way invisible to most people, probably via cost of living adjustments that fail to track inflation, means testing, and just printing money. I signed my wife up for social security early (62) on a bet that they would renege somehow. She didn't earn much; I did. What started as a small payment turned miniscule. Here is her statement:
Really? $411 per month was whittled down to $63 per month? The part I cut off was the final clause that said, “Don't spend it all in one place, bitch.”
The risk is in the substrata of the pension system in which bankruptcy and insolvency are smash-mouth realities. I didn’t mention state debt in the previous section because much of it is hiding as unfunded obligations to pensioners. Paying state and municipal employees with pension promises was such an easy way to compensate people without raising the money. Enter reality: public pensions are now $3 trillion in the hole.140 How long would it take to make up $3 trillion? Noooo problem! Simply pay off a million dollars a day for 8,200 years (assuming 0% interest.) Some examples are in order. Oregon’s public employee retirement system has a $21 billion unfunded liability (6 years of payouts), and it’s growing as returns of 2% somehow fall short of assumed returns of 7.7%.141 Those assumed 7–8% returns have never been accurate over the long term when adjusted for inflation, fees, and taxes. Connecticut, Kentucky, and Hawaii have similar problems.142 Illinois is the gold standard of insolvency. The Illinois Teachers Retirement System is only 40% funded and currently assumes annual returns of 7.5%.143 How did this happen? For starters, the employees are the best compensated in the Union, including free health care for life.144 Wrap your brain around that: they work for 20–30 years and get free health care for up to 50–60 more years? Meanwhile, state labor unions are asking for raises out of “fairness.”
As you drill down, you find bloodbaths pretty much everywhere in municipalities. Chicago’s pensions in aggregate are 20–30% funded depending on whom you ask.145 Pending legislation, however, will allow the insolvent state of Illinois to bail out the insolvent city of Chicago.146
Isn’t there something you can do? Even if we get serious about savings among, say, the boomers, many are way past their fail-safe points. You can hear the barn door slam. At least those with defined benefit pensions are safe because they are protected by contractual obligations. Legal schmegal: there is no god-damned money! Pension cuts are just beginning but could accelerate. The Teamsters’ Central States Pension Fund is looking to cut 400,000 pensions by 55% or go flat broke—zero dollars—by 2026.147 Recent rulings preventing pension cuts are, in my opinion, the courts simply stating that it is illegal to avoid bankruptcy through selective nonpayments. Bankruptcy is about distributing remaining assets in a fair and equitable way to all creditors when there is not enough to go around.
There is evidence of an old-school-style run on pensions: workers are retiring in serious numbers to remove their assets from faltering pension programs. I hear rumors of University of Illinois faculty moving to other institutions—five to Georgia Tech alone—to remove their pensions at full value from the Illinois system while it’s still possible. Dallas police and firefighters are leaving the job to grab their full pensions from a dwindling stash.148 It turns out there was also a bit of a Ponzi scheme going on, which caused the mayor to propose a 130% increase in property tax.149 I don’t see a reelection in your future, Mr. Mayor. As seasoned public servants, they might be able to move to Austin or Houston. There is now evidence the withdrawals in Dallas are being shut down.150 I could even imagine claw backs of the rolled-out funds.
At the personal level, self-directed defined contribution plans paint a clockwork orange big time. Gundlach says the 40–50 crowd is “broke.” Well he exaggerated: the average American household has $2,500 saved, and the average couple consisting of two 45-year-olds has $5,000.151 Technically speaking, they are not broke, but they are totally screwed. Across all working-age families, more than 50% have no savings whatsoever,152 which is one way to render low returns moot. The 55- to 60-year-olds are positioned closer to the pearly gates but have median retirement nest eggs of $17,000.153 Assuming a couple eats six cans of dog food per day (2 × 3) and they have no other bills, the couple will run out of money in 11 years (which, on the bright side, will seem like eternity). The top 10% have less than $300K.154 The numbers could be skewed to the optimistic side: 20% of all eligible 401(k) participants have loans outstanding against their 401(k) accounts.155 This practice is so egregious that some companies are offering alternative payday loans to their employees, albeit with elevated interest rates, of course.156 I remember reading about company towns in West Virginia coal country paying their employees in company scrip. The practice was outlawed.
Of course, I’ve just described a potpourri of anecdotes in the U.S. Maybe it’s better in other countries. Right off our coast we have the tropical paradise of Puerto Rico, which is so up to its ass in debt that creditors essentially own the island.157
“The ECB’s record low interest rates are causing ‘extraordinary problems' for German banks and pensioners and risk undermining voters’ support for European integration.”
~Wolfgang Schäuble, German financial minister
What about Europe? There’s where it gets fugly. The markets in pretty much everything that is bought and sold are at nosebleed valuations. There is little or no room left for gains through changes in valuation. Interest rates on bonds are miniscule, even negative (vide infra.) You won’t make anything on those bonds, but you could lose enormous principle when—not if—interest rates normalize after a 40-year downward march. There is some evidence that the reversal has now started. Equity markets also have a mean regression in their future despite what the proponents of the mathematically sophisticated Greater Fool Theory espouse. If the markets correct—they always do—you can adjust all those numbers I just cited by an arithmetically simple factor of 0.5. Could an industrial revolution save us? The most stupendous industrial revolution in history—the U.S. juggernaut in the twentieth century—returned an inflation-adjusted 4–5% including dividends using the Dow index as a proxy. Unfortunately, I do not believe those returns are corrected for management fees and taxes. I’m thinking 3% is optimistic. I’m thinking Illinois and the rest of the world are still toast.
“US deflation is largely a myth, like the Loch Ness monster or North Dakota.”
[email protected], undefeated Twitter Snark Champion
“The debasement of coinage . . . is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way.
The central bankers and macroeconomists all want inflation. There are media pundits who buy into this metaphysical notion that inflation is good (no offense to the metaphysicists). Dispelling the notion that this quest for inflation is just hyperbole calls for some quotes to capture pundit sentiment:
“I think there is a loss of confidence in the ability of central banks in the long run to regenerate inflation.”
~Ken Rogoff, Harvard professor
“Deflation . . . is bad news because it makes people less willing to borrow and spend—anticipating lower prices, consumers will put off spending—and could also lead to a fall in wages.”
~IMF economist, still waiting to buy an iPhone and flat-screen TV
“All the G7 countries are suffering from a dearth of inflation.”
~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve
“I think they’re heading intentionally for a higher rate of inflation so that once they’ve gotten to, say, an inflation rate of 3 percent, 3.5 percent, that’s when they can jack up short-term rates.”
~Martin Feldstein, Harvard professor and former president of the National Bureau of Economic Research
“Why You Should Hate Low Inflation”
~Time magazine headline
“Welcome news for America’s renters could be unhelpful for the Federal Reserve. . . . Any cooling in the most pronounced driver of inflation means the Fed will have to wait even longer to reach their 2 percent price target.”
“Inflation is not at our stated target, not near our stated target, and hasn’t been so in quite some time.”
~Daniel Tarullo, governor of the Federal Open Market Committee
“[T]he ECB needs to signal that it is serious about pursuing its inflation mandate, including via a stepped-up pace of monthly QE purchases.”
~Robin Brooks, Goldman’s chief FX strategist
“The elusive quest for higher inflation”
~Yasser Abdih, senior economist at the IMF
They may believe that by generating small positive inflation levels that seem to accompany strong economic growth, they will somehow create that growth. More likely, they fear no inflation in an inherently inflationary credit-based banking system. If central bankers furiously debase their currencies with an inflationary tailwind and deflation appears nonetheless, then somebody screwed up (them). I buy this latter thesis. Of course, the measure of inflation has been debated ad nauseam in the context of stats rendered dubious by hedonic adjustments, substitutions, unvarnished fraud, and adjustments based on reading goat entrails. I discussed these frauds years ago.158 Inflation is certainly not 2% but some number much higher if one is measuring what Joe Six-pack is shelling out to exist.159 (Anticipating squeals about MIT’s Billion Price Project, I discussed it in last year’s review: I think it’s bogus.)
“The grim reality is that real inflation is 7+% per year, and this reality must be hidden behind bogus official calculations of inflation, as this reality would collapse the entire status quo.”
~Charles Hugh Smith, Of Two Minds blog
The fear of deflation is fear of asset deflation. With huge leverage in the system, a collapse in asset prices becomes insolvency and cardiac arrest. The problem is that the Fed’s inflation policies are the root cause of the deflationary risk. To me, the existential risk is hyperinflation, which is in full bloom in Venezuela160 and germinating in Nigeria.161 Closer to home (for Americans), rents have been soaring—13.2% per year in Boston since 2010, for example.162 Health plans are rising double digits per year, looking to jump more than 15% next year.163 College tuition is on a headline-making inflationary trajectory of 6% per annum above the rate of the admittedly dubious inflation rate.
“The unproductive buildup of debt caused the Great Depression of the 1930s and the Great Recession of 2008.”
~Chetan Ahya, Morgan Stanley
“If businesses and households were to resume borrowing in earnest, the US money supply could balloon to 15 times its current size, sending inflation as high as 1,500%.”
~Richard Koo, Nomura
“The bond market’s 7.5% 40-year historical return is just that—history.”
~Bill Gross, Janus
Sounds a little ominous. He also notes that “global yields are the lowest in 500 years of recorded history.” Alas, there are other bond doomsters. Paul Singer says “the bond market is broken . . . the biggest bubble in the world . . . never-before seen asymmetry between potential further reward and risk.” Former punk rocker and newly crowned Bond King Jeff Gundlach now moves the markets with his pronouncements. Jeff wails that the current market for 10-year treasuries is the worst opportunity in its long history. He calls it “mass psychosis . . . not guided by the markets.” With a little math wizardry that only a bond king could muster, Jeff says, “a 1% increase in the rates would result in up to $2.4 trillion of losses.”164 I’m not sure investors hiding in the safe haven of bonds are quite ready for those losses. They’re betting that rates will never rise 1%. As I type, that is proving to be wrong—possibly dead wrong.
Figure 16. Bond holder, died circa 1981.
At some point, this party has (had) to end. In 2014, James Grant of the legendary Interest Rate Observer described three bond bulls in America during the past 150 years—“1865–1900, 1920–1946, and 1981 to the present.” The first two did indeed end, and probably unexpectedly given how long they lasted and investors’ willingness to extrapolate to infinity. The third will end too. The bond market is like the Atlantic conveyor that must keep moving currents around the Atlantic Ocean.165 When the conveyor sputters, we get an ice age. When the bond market sputters, we will get the credit market analogue of an ice age.
What’s different this time—a dangerous choice of words—is that the highly financialized markets are not only huge but also highly correlated. The correlation reaches way beyond the conventional debt markets into the shadow debt markets and the $1 quadrillion derivatives market—a quadrillion dollars of the most screwed-up, leveraged investments based on blind faith and confidence the world has ever witnessed. No problemo, say the optimists. We will “net” those puppies. Netting is when you round up investments on each side of the bet and simply cancel them out (like from either side of an equal sign.)166 Ya gotta wonder which genius is going to net $1 quadrillion dollars of derivatives in the midst of a raging inferno. It didn’t work in ’09, and it won’t work the next time, especially in a market so large Avogadro might wince.
“They have to normalize interest rates over a period of two, three, four years, or the domestic and global economy won’t function.”
How crazy has the bond market become? The French sold 50-year bonds.167 Ireland sold its first so-called century bond less than three years after it exited an international bailout program.168 Spanish 10-year interest rates are below those of the U.S., prompting James Grant to suggest “a return to the glory of Rome.” The Eurowankers (European bankers) are monetizing debt by buying corporate bonds to jam money into (1) a system that doesn’t need any more, and (2) the pockets of cronies who always demand more. Shockingly, the cronies front-ran the purchase program by buying existing corporate debt169 and creating new types of corporate debt, all for a tidy profit . . . for now. Taking a cue from the U.S. postal service, Japan is offering “forever bonds”: you get interest—a low 1% interest at that—but you never get paid back your principle.170 The idea that inflation will never rear its ugly head seems presumptuous, even preposterous. It would be safer loaning money to your adult children, who will never pay you back either. You know to the penny your return on that investment.
“Bonds are still offering positive yields.”
Alas, as is often the case, CNBC isn’t even right on what would be a truism in any other era. I could go on talking about ridiculously low yields, but now we get “the rest of the story.”
“It seemed like a good idea at the time: Cut interest rates below zero to revive growth.”
On April 1, 2006, an article appeared endorsing zero-coupon perpetual bonds.171 You give somebody your money, and they pay you no interest and you don’t get your money back. Irate readers forced this hooligan to “politely point out to them the date of publication” (April 1st). Did you know the word gullible is not in the dictionary?
Unbeknownst to the author, the article wasn’t satire; it was foreshadowing. There is no endeavor in which men and women of enormous intellectual power have shown total disregard for higher-order reasoning than monetary policy. We are talking “early onset” something. I am not an economist, but my pinhead meter is pegging the needle. Let’s hop right over ZIRP (zero interest rate policy) because it is so 2014 and head right into NIRP (negative interest rate policy). NIRP is where you pay people to lend them money. (Check the date: it’s December, not April.) You heard that right: you give them money, and they give you back less.
“The arrogant, suspender-snapping, twenty-something financial geniuses are yapping in my face. . . . I still can’t fathom ‘negative’ interest rates. It seems the ultimate insanity to say a short sale of a sovereign bond becomes a ‘risk-free’ trade.”
~Mr. Skin, anonymous guru who writes for Bill Fleckenstein
Capitalism progressed for 5,000 years without interest rates ever stumbling on the negative sign (which, by the way, was invented by the Arabs more than a millennium ago). You can no longer simply say that bonds are at multi-century highs; it is mathematically impossible to bid rates on normal bonds into negative territory. It takes a special kind of monetary fascism to create negative rates.
Japan is at the vanguard. Eight days after Hiruhiko Kuroda, head of the Bank of Japan (BoJ), announced he was not considering negative interest rates, he jammed rates negative.172 That was like a knuckleball from the famous pitcher Hiroki Kuroda. Nearly 80% of Japanese and German government bonds are now offering negative yields (whatever “yield” now means).173 Fifty-year Swiss debt has gone negative.174 Early this year, negative yielding global sovereign debt surpassed $10 trillion “for the first time.”175 Really? For the first time? Sovereign debt first dipped below zero only two years ago. An estimated $16 trillion (30%) of sovereign debt is now under the auspices of NIRP (Figure 17).176 Over a half-trillion dollars of corporate debt is also at negative rates.177 Reaching for yield in corporate debt markets always seemed risky, but that’s nuts. By now it could be $1 trillion. I’ve lost track. NIRP has infected the consumer debt market: Denmark and Belgium are offering negative interest rate mortgages.178 (I just soiled my thong.) By the way, you folks with big credit card debt will likely have to wait for relief; your rates are pegged above 20%. Maybe you’ll get some helicopter money.
Figure 17. Negative yielding debt with a subliminal flare.
These Masters of the Universe, economists and bankers extraordinaire, and their enthusiastic supporters of modern-day monetary theory certainly didn’t leap into the NIRP abyss casually. Let’s listen to the justification in their own voices. While reading, rank their comments as (1) pragmatic resignation, (2) dubious, or (3) delusional rants of the clinically insane:
“If current conditions in the advanced economies remain entrenched a decade from now, helicopter drops, debt monetization, and taxation of cash may turn out to be the new QE, CE, FG, ZIRP, and NIRP. Desperate times call for desperate measures.”
~Nouriel Roubini, professor at New York University
“Well, let’s face it. They can do whatever they want now.”
~Ken Rogoff, dismissing the risk of government taxation by NIRP
“The degree of negative rates introduced by ECB is bigger than Japan. Technically there definitely is room for a further cut.”
~Haruhiko Kuroda, head of the Bank of Japan
“It appears to us there is a lot of room for central banks to probe how low rates can go. While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.”
~Malcolm Barr, David Mackie, and Bruce Kasman, economists at JPM
“Negative Rates Are Better at QE Than Actual QE”
~Wall Street Journal headline
“Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time and the idea is the lower the interest rate the better it is for investors.”
~Stanley Fischer, vice chairman of the Federal Reserve, based on two years of data on NIRP
“The prospect of being charged, say, 6% a year just to hold cash could unsettle people. For such a policy to work as intended, officials would have to do a lot of explaining ahead of time . . . ensuring that the public understands the central bank’s goals and supports its methods of achieving them.”
~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve, bankersplaining Jedi mind tricks
So these paternalistic libertarians are doing it for the children. What’s the problem? Let’s start with savings. There is no income left in fixed income. All those unresilient consumers are getting zip on what money they have. The low rates are designed to get them to spend their paltry savings. Peachy. A USA Today headline read, “How to break Americans of shortsighted saving habits.” Let’s start by giving them a return on their savings, for Pete’s sake. Giving them negative returns, however, in a twisted way is forcing them to save like their parents. Maybe I've misunderstood the headline. Maybe it's excoriating the public for their growing addiction to saving, causing the wholly ludicrous and intellectually impoverished Paradox of Thrift.179
This naturally leads back to the inflation/deflation debate. The inflation that the Fed desires comes, at least in part, from inherently inflationary fractional reserve banking in which interest rates demand net dollars to increase. Negative rates, by contrast, are inherently deflationary. Every year the banking system has less. This doesn’t seem that hard to grasp.
“Negative interest rates are ridiculous, particularly in a fight against deflation. They ARE deflation. . . . You are necessitating savings.”
~Jeff Gundlach, DoubleLine
Low and negative rates are destroying pension management, insurance, and even banking industries. When your business model is to take in money, make decent returns, pay out a little less, and skim off the difference, then negative, zero, or even low interest rates are deadly. The model fails. This doesn’t seem hard to grasp either.
“All pension plans everywhere in the world are being destroyed. Trust funds, insurance companies, endowments—they are all being destroyed.”
~Jim Rogers on NIRP and central bank policies
Finally, low interest rates actually hurt the economy by keeping the weak alive, preventing the much needed creative destruction. Unviable companies on the life support of loose credit cannibalize serious businesses measurably, sometimes even fatally. You must cull the herd of the sick and weak.
“Insurers have long-term liabilities and base their death benefits, and even health benefits, on earning a certain rate of interest on their premium dollars. When that rate is zero or close to it, their model is destroyed.”
The big credibility problem is that I’m just a chemist “identifying” as a pundit going toe-to-toe with some serious paid-to-play central bankers and their groupies. To rectify that, let’s listen to some critics of NIRP with gravitas in their own words:
“Maybe Italian banks are telling us that central bankers and their negative interest rate policies are actually destroying the Japanese and European banking system. . . . Even if they put [short-term rates] back to zero, imagine the carnage, at least in the short-term bond markets.”
~Peter Boockvar, chief strategist of the Lindsey Group
“The six months under review have seen central bankers continuing what is surely the greatest experiment in monetary policy in the history of the world. We are therefore in uncharted waters, and it is impossible to predict the unintended consequences of very low interest rates, with some 30% of global government debt at negative yields, combined with quantitative easing on a massive scale.”
~Lord Jacob Rothschild, overpaid blogger
“Negative interest rates are the dumbest idea ever. It’s horrible. Look at how badly it’s been working.”
~Jeff Gundlach, DoubleLine
“Under a negative rate scenario, the only participant receiving more cash over time is the government. The private sector slowly collapses as we are seeing in Japan and Europe in real time.”
~Michael Green, Ice Farm Capital
“If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3,000 BC? . . . The Bank of England is doing things today that it has never done in its history, which is 300 plus years. . . . In finance, mostly nothing is ever new. . . . However, with respect to interest rates and monetary policy, we are truly breaking new ground.”
~The James Grant Anthology
“What is currently happening in various bond markets as a result of this and other interventions is simply jaw-dropping insanity. . . . What makes the situation so troubling is the fact that investors seem to be oblivious to the enormous risks they are taking. They are sitting on a powder keg.”
~Pater Tenebrarum, independent market analyst
“I think what they’ve done, particularly the unconventional stuff—and there has been so much of it—has led many people into looking upon all of this as experimental policies smacking of panic.”
~William White, senior advisor at the Organisation for Economic Co-operation and Development
“Negative and low interest rates around the world are crushing savers, and those policies are going to become the biggest crisis globally. We have become too dependent on central bankers.”
~Larry Fink, chairman and CEO of BlackRock
“Negative interest rates in Japan is blowing my mind.”
~Jose Canseco, designated pundit
What’s the end game? My best guess is that the system blows up and a lot of bankers find themselves seriously upside down . . . like Mussolini. The silent bank run is already happening. In a free market, NIRP is precluded by cash and hard assets. NIRP in Japan caused a run on safes for hoarding cash.180 A headline announced, “German Savers Lose Faith in Banks, Stash Cash at Home.”181 I was told by a high-level source that one of the world’s largest insurers was renting vaults to store physical currencies. Commerzbank was considering hoarding billions to avoid European Central Bank (ECB) charges.182 Mark Gilbert of Bloomberg notes that storing $100 million as stacks of bills would basically take a vault the size of a large closet.183 See the theme? The financial intermediaries are storing hard cash. Alas, our central banker overlords won’t stand for it.
“There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.”
You ever notice the War on Anything never works? Whether it be drugs, terror, poverty, Christmas, hunger, you name it, it becomes an interminable, profoundly costly adventure. Now we have the War on Cash. OK, millennials, listen up. You might like paying for everything with your Swiss Army phones. There are rumors you can even swipe G-strings on pole dancers with your phones, which means you’ve totally lost the plotline. If we go to cashless, you won’t have the scratch needed to buy a cell phone before long. These globalists wish to remove your right to an important civil liberty—to hold and spend wealth outside the view of the government and beyond the control of the banks.
“A global agreement to stop issuing high denomination notes would also show that the global financial groupings can stand up against ‘big money’ and for the interests of ordinary citizens.”
~Larry Summers, Harvard professor and former secretary of the treasury
The global elite want to eliminate cash so that they can inflict monetary policy without restraint. As Rogoff says, cash gums up the system. When the former secretary of the treasury, Larry Summers, starts supporting the elimination of cash because it will “combat criminal activity . . . for the interests of ordinary citizens” you should sit up and pay attention. He says we “are essentially on a fairly dangerous battlefield with very little ammunition.” He is not talking about the War on Crime but rather efforts to fight the market forces attempting to curb the global banking cartel. Ex-Fedhead Kocherlakota tried to get coy using reverse psychology on free marketeers by arguing that “governments issuing cash . . . is hardly a free market.” As the story goes, the libertarians should support a cashless society by letting currencies compete in the marketplace.184 Very clever, Yankee dog! Of course, he forgot to mention that the government would then shut competitors down like they did to Bernard von NotHaus, who got his assets seized and went to prison for offering such competition. Satoshi Nakamoto, Bitcoin founder, is on the lam.185 Your arguments are specious, NK.
“In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy. Unfortunately, the existence of cash gums up the works.”
Ken Rogoff carried the standard in the War on Cash this year by hawking his new book, The Curse of Cash. He tirelessly tried to make the case for a cashless, bank-rich society, arguing that “paper currency facilitates racketeering, extortion, drug and human trafficking, the corruption of public officials not to mention terrorism.” He argues that “cash is not used in ordinary retail transactions.” Really? What do stores put in the cash registers, coupons (which are going digital)? To say he supports the termination of cash is not quite fair: he endorses using only low denominations such as $10 bills, which buy you a pack of cigarettes (maybe). Don’t spend it all in one place. On noticing that hundreds of commenters in a Wall Street Journal editorial186 showered him with suggestions on how to render him testicle free, I suggested in a brief e-mail that people are clearly stating that the idiosyncrasies of cash are a small price to pay for personal freedom. He, in turn, suggested I read his book. Not likely. There was pushback, however. Jim Grant used his sharp wit to get Ken halfway to eunuch status.187
When the globalists left Davos,188 the War on Cash seemed to accelerate almost overnight:
- Deutsche Bank CEO John Cryan predicted that cash won’t exist in 10 years.
- Norway’s biggest bank, DNB, called for an end to cash.
- Bloomberg published an article titled “Bring On the Cashless Future.”
- A Financial Times op-ed titled “The Benefits of Scrapping Cash” advocated the elimination of physical money.
- Harvardian and ex-Harvard president Peter Sands wrote a paper titled “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes” in which he waxed on about fighting wars—wars on crime, drugs, and terror.
- Mario Draghi, head of the ECB, phased out the €500 note—30% of the physical euro notes in circulation: “We want to make changes. But rest assured that we are determined not to make seigniorage a comfort for criminals.”
- The New York Times called for the termination of high-denomination notes.
Again, all of this was within a month of the shrimpfest at Davos. You and your banking buddies are the criminals and seem quite uncomfortable with cash. If you really care about crime, shut down HSBC:
With physical cash curtailed, JPM estimates the ECB could ultimately bring interest rates as low as negative 4.5%.189 (Two decimal point precision: nice.) Phasing out the $100 bill would eliminate 78% of all U.S. currency in circulation.189 Hasbro announced that the game Monopoly will replace cash with special bank cards (special drawing rights?) in which players buy and sell with handheld devices. More recently, Prime Minister Narendra Modi of India withdrew all high-denomination bills essentially overnight.190 The results were predictable for a society in which cash really is king: the system shut down. Nearly instantaneously, India’s trucking industry—millions of trucks—were parked on the roadside: out of cash means out of gas.191 As I type, the chaos continues.
There are, thankfully, influential supporters of cash. Bundesbank board member Carl-Ludwig Thiele warned that the attempt to abolish and criminalize cash is out of line with freedom.192 Bundesbank president Jens Weidmann said it would be “disastrous” if people started to believe cash would be abolished: “We don’t want someone to be able to track digitally what we buy, eat and drink, what books we read and what movies we watch.”193 Austrian economist Frank Shostak, by no means influential because Austrians are considered to be insane, reminds us that “abolishing cash to permit the central banks to lower interest rates into deeper negative territory will lead to the destruction of the market economy and promote massive economic impoverishment.”194
Maximum mirth came when Jason Cummins, chief U.S. economist and head of research at hedge fund Brevan Howard, stood up at a meeting littered with devout globalists and denounced the War on Cash and quest for inflation as stemming from the “Frankenstein lab of monetary policy.”195 Jason went on a rant: “You are not going to have independent central bankers in the next 10 years if you keep on this path. The economy has rolled over and died in an environment when financial conditions have never been easier. . . . People aren’t consuming, businesses aren’t investing, they aren’t buying houses even with a 3.5% mortgage rate. . . . The maestro culture created by Greenspan has been one of the worst features of central banking. . . . My biggest worry is that the public will conclude that . . . capitalism is just socialism for the rich.” Oops. Too late, dude.
Arguments about the insecurity of cash seem specious when you look at how the digital world has fared lately. The thriving sovereign state of Bangladesh was raided for a cool $100 million by a series of unauthorized withdrawals using the global SWIFT check-clearing system.196 One could imagine that third-world safeguards against such a heist might be lax, but the hackers removed the booty from the New York Federal Reserve. A Fed spokesperson offered the official response: “Sorry. Our bad.” Apparently, the Fed has been hacked more than 50 times since 2015. Gottfried Leibbrandt, the CEO of SWIFT, has expressed grave concern about the threat hackers pose to the banking system.197 Ya think?
On a more micro scale, six of my colleagues got their paychecks phished. They were tricked into signing into their financial home page. With the passwords in hand, the Nigerian princes rerouted their direct-deposited paychecks. Food stamp computers went down for over a week in June.198 An Ecuadorean bank got clipped for $12 million, blaming Wells Fargo for not plugging a leak.199 It’s probably in the Clinton Foundation. The risks of cash in society seem to pale in comparison with the risks of digits in the banking system.
The termination of cash is all some dystopian futuristic abstraction that won’t come to pass, right? No. Brits are complaining that they are being stopped from withdrawing amounts ranging from £5,000 to £10,000: “When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”200 The phrase, “give me my goddamned money before I jump the counter and beat the crap out of you” comes to mind. Better yet, say it’s for Zika medication and start coughing. The €500 note did indeed get abolished.201 Angela Merkel put caps on bank withdrawals. 202 I heard from a friend that Wells Fargo was obstinate about a large money transfer. (We return to Wells Fargo’s disasters in the banking section.) Some restaurants are refusing cash.203 What does “all debts public and private” mean?
Nightmare scenarios in a cashless society include: (1) negative interest rates of any magnitude; (2) civil asset forfeiture (but I repeat myself); (3) bank bail-ins; (4) getting booted from or locked out of the system—by mistake or otherwise; (5) sovereigns getting booted from the SWIFT check-clearing system (just ask Pootin); (6) outlawing gold (again); and (6) hackers! We could see a black market based on S&H Green Stamps.
“The unpalatable truth is that the banking model is broken. The days of generating gobs of cash from “socially useless” financial engineering . . . are over.”
~Mark Gilbert, Bloomberg
“It’s the big banks that continue to prefer being highly leveraged. And too many policymakers are deferring to them. Like it or not, that means we are in line for another stomach-turning round on the global economy’s wild ride.”
~Simon Johnson, MIT professor and former IMF chief economist
The banking system was not fixed in ‘09. The putrid wound was stitched up without disinfectant by a cabal of bankers and regulators, all agreeing that the system had to retain its current form. The assets of the 10 largest banks—greater than $20 trillion—grew 13% per year in the last 10 years. This is not my idea of mitigating systemic risk. Now we are near the top of an aging business cycle where bad loans start unwinding and bad ideas begin to die. Gangrene is beginning to show. Collateralized debt is picking up because the uncollateralized refuse starts piling up like during a NYC garbage strike.204 Collateralized loan obligations—the dreaded CLOs—are starting to liquidate.205 Banks are rebuilding teams for debt restructurings.206 As noted above, the Dallas Fed is attempting to extend and pretend energy loans.207 Does this kind of crackpottery ever work? Citigroup failed—as in big fat F-like failed—its stress tests.208 Those were the Kaplan practice tests. Many banks will fail when the real stress test arrives. Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, thinks we will unwind banks in an orderly process.209 Of course he does, and of course I don’t.
“I don’t trust Deutsche Bank. I don’t trust what they’re saying.”
~David Stockman, former Reagan economic advisor and former Blackstone group partner
Although huge problems could be triggered by a default almost anywhere in the system—an internal hedge fund or even an unusual presidential election—the disaster will be global. The first raging inferno is most likely to burn in Europe and will undoubtedly include Deutsche Bank (DB). DB was the most putrid of the ’09 wounds; it never really healed. In 2014, it was forced to raise additional capital by selling stock at a 30% discount. But why?210 This year DB sold $1.5 billion in debt at junk rates (admittedly a paltry 4.25% in this era).211 German Finance Minister Wolfgang Schäuble said he has “no concerns about Deutsche Bank,”212 which means they are in deep trouble. By early 2016, the scheisse was hitting the lüfter. In March, DB was again told to grow its capital base.213 In April, DB settled its LIBOR manipulation suit ($2.1 billion in fines) along with its silver manipulation charge.214 By May, one of the two CEOs—one CEO too many—decided to spend time with his family and the other was given emergency authority for “crisis” management. Soon both CEOs had become stay-at-home dads.215
A missed debt payment by Greece in June suggested a full default,216 which correlated with the S&P lowering DB’s bond rating to “junk-lite” (three notches above “junk”).217 DB refused to deliver physical gold to customers (shades of MF Global),218 and later in the fall settled a gold-rigging suit.219 Business Insider suggested that DB “is coming unglued,” which is a pathetic euphemism for defaulting on interest payments.220 Bond downgrades often foreshadow more downgrades. Twenty percent of DB’s workforce was sent home to family.221 A few weeks after the EU slapped Apple with a $14 billion surcharge for “back taxes,”222 the U.S. slapped DB with a $14 billion fine for doing what banks do.223 Seems oddly coincidental. A $14 billion fine may also seem quaint in a world of trillions (and now quadrillions) but not with a market cap of $17 billion. Rumors that the fine was markedly reduced proved to be hedge fund hijinks.224 A putative Qatarian bailout was also profitable fiction.225 John Mack of Morgan Stanley suggested all is hunky-dory because DB will be propped up by the Fatherland.
“Banks are dying and policymakers don’t know what to do. Watch Deutsche Bank shares go to single digits and people will start to panic.”
~Jeff Gundlach, DoubleLine
The problem in a nutshell is that DB has a nosebleed 26× leverage according to Hussman. It has $70 trillion in notional derivatives looking for safety netting. If it starts triggering credit default swaps (CDSs), it’ll be like a kangaroo in a minefield, and CDSs began spiking in September.226 Rumors of cash restrictions and defaulting contingent convertible (CoCo) bonds abound.227 Raoul Pal of Real Vision says CoCo bonds are the crisis.228 They turn into equity near the strike price, which then drives equity prices down and destroys the bank . . . like the doomsday machine in Doctor Strangelove.229
The Italians are in a world of pain. Italy’s third largest bank, Monte Paschi, failed in 2012,230 but it got worse this year.231 Worse than failing? Trading was halted on it after falling only 7%.232 Italy banned short selling, which is the last refuge of interventionists before the inevitable failure.233 Italy’s major banks are bleeding losses and have been sold off more than 50% this year. George Friedman, founder of Stratfor, tells us that the Italian banks have been buying crap loans from Europe since the crisis and are heading for bail-ins (vide infra).234 He goes on to say that a U.S. recession could trigger systemic failure and ensuing nationalism. Italy cannot inject government funds into its banking system until it has first forced a trauma-inducing “bail-in” at any bank getting aid. A €5 billion bailout fund created in Italy this year took over Veneto Banca after a €1 billion capital increase failed to get bids.235 The idea was to channel private sector money into rescuing the banks. Wanna bet the private philanthropists laundered public money? As I put this document to bed, a big vote in Italy essentially to leave the EU may have just nuked the Italian bond market.236
The Swiss National Bank (SNB) says UBS and Credit Suisse will have to raise more than 10 billion Swiss francs in capital.237 A loss in a single quarter at Credit Suisse wiped out years of profit.238 Spain’s Banco Popular, looking for €2.5 billion in capital, offered low interest loans provided to . . . wait for it . . . purchase the bank’s newly issued shares.239 The €29 billion Bremen Landesbank is teetering on failure, dropping 50% market cap in a heartbeat.240 Needless to say, investors owning European bank ETFs are experiencing Dresden-like firestorms.
On this side of the pond, we have issues, but they don’t seem systemic yet. Citigroup, the U.S.’s largest derivatives holder, bought $2.1 trillion of notional credit derivatives from DB and Credit Suisse.241 I guess Citi has been designated a “bad bank” (drew the short straw) kinda like Santander in '09. Its failed stress test caused authorities to rhetorically ask, “Why not give them the mine tailings?” Goldman, a bank since ’09, settled for a $5.1 billion payment for dubious deeds with no guilt, no jail time, and probably low payments after tax credits.242 Settling was a prescient call if the alternative was to wait and bribe President Clinton.
JPM underwrote an equity offering for Weatherford International—sporting the great stock symbol WTF—to help raise money from investors to pay back debt to JPM.243 No conflict there, eh? I think that is called “catfishing”. Banks appear to be doing this in large numbers. We found out that JPM knew about Bernie Madoff’s Ponzi scheme for 20 years.244 That’s like driving the getaway car. Bruno Iksil, the London Whale, broke silence by claiming he was a patsy.245 No, really? JPM announced a share buyback one month after Jamie Dimon bought 500,000 shares to catch the gain.246 A letter from the Fed seems to suggest that JPM could destroy the U.S. in the event of another financial crisis.247 Thank God that’ll never happen again.
“I am deeply sorry that we failed to fulfill our responsibility to our customers, to our team members, and to the American public.”
~John Stumpf, Wells Fargo chairman and CEO
The award for Biggest Scandal goes to Wells Fargo, the pride and joy of the Orifice of Omaha. Wells Fargo employees secretly created millions of unauthorized bank and credit card accounts beginning in 2011.248 Funds from customers’ existing accounts were moved to the newly created accounts without knowledge or consent. Customers were not happy with the overdraft fees. Even CNN expressed awareness and shock. As usual, the $185 million fine doesn’t begin to address the problem,250 especially given that the prosecutors, happy to absolve the executives of wrongdoing, were overheard muttering “fine by me.” Wells Fargo employees terminated for not reaching their fraud quotas are suing for $2.6 billion.251 For the second time, my colleague Robert Hockett has prompted me to post a quote:
“It ends up being a win-win. The regulator gets some kind of payment from the accused, and the accused gets to ease the risk of private plaintiff litigation by not admitting to guilt.”
~Robert Hockett, Cornell professor of law, on the Wells Fargo settlement
What I haven’t been able to figure out is whether duplicated charges for campaign donations to Hillary that funneled through Wells Fargo are somehow connected.252 Even when the duped Hillary supporters discovered their $25 donations were being replicated without consent, they couldn’t seem to stop them.253
“If one of your tellers took a handful of twenties out of the cash drawer, they could end up in prison. . . . The only way Wall Street will change is when executives face jail time. Until then, it will be business as usual.”
~Elizabeth Warren, POTUS in training, to Wells Fargo CEO
Of course, these scandals pale in comparison to Wells Fargo’s scandal for laundering drug money for which it was fined in 2014. If Wells Fargo were taken behind the Eccles Building and shot, it would be . . . fine by me.
“Its models are unreliable, its policies erratic, and its guidance confusing.”
~Kevin Warsh, former Federal Reserve governor, commenting on the Federal Reserve
“Kevin, confusing and erratic is voting for QE and then criticizing it."
~Neel Kashkari (@neelkashkari), president of the Minnesota Federal Reserve
Kashkari is a questionable Fed governor but was great in The Mummy (Figure 18). The Fed governors have noticed that healthy economies often cause inflation. In what seems like an utterly simplistic failure to understand causality and correlation, they have concluded that causing inflation will make the economy healthy. That’s like warming a corpse to 98.6 degrees (maybe even a few tenths warmer) to bring it to life. Hey guys: try jolting it with electricity while rubbing your palms together and cackling. I’m sure it will work.
Figure 18. Neel Kashkari.
Many economists, especially Fed economists, have transitioned from trying to understand the economy—a daunting task indeed—to being self-appointed economic overlords in charge of controlling the economy. This Hayekian fatal conceit has required some serious fibbing and self-delusions, which include endorsing:
(1) adjustable-rate mortgages when rates were at record lows;
(2) equity withdrawal from one’s house to spend on lattes;
(3) pulling consumption forward, flipping off the future;
(4) protecting bad businesses with ultra-loose credit;
(5) bailing out other sovereign states;
(6) dropping interest rates—bleeding the patient—to elicit spending;
(7) printing money to pay off debt;
(8) changing perception—the wealth effect—to change reality;
(9) printing our way to prosperity;
(10) falling prices (deflation) as bad;
(11) helicopter money as not entirely insane;
(12) no prison time for thefts in excess of $1 billion.
You guys don’t control the economy any more than your children steer shopping carts disguised as race cars. As Art Linkletter would say, Fed governors can say the darnedest things. From the mouths of boobs:
“[P]eople charged with managing the economy…”
~Narayana Kocherlakota, fatally conceited
“Our economic forecasting record is nearly perfect.”
~Janet Yellen, FOMC chair, ignoring the Federal Reserve’s last 100 years
“You should trust the Fed, not markets.”
~Adam Posen, former economist at the New York Federal Reserve
"#uscurrency never loses its value.”
~San Francisco Federal Reserve (@sffed) tweet
“The Federal Reserve is not politically compromised.”
~Janet Yellen, FOMC chair
“Negative interest rates cannot be ruled out.”
~Janet Yellen, FOMC chair
“Everybody on this panel is painfully aware of what the costs of the last recession were and wants to avoid a future recession.”
~Eric Rosengren, president of the Boston Federal Reserve, on avoiding the unavoidable
They like to intervene, but no self-respecting central bankers would take it upon themselves to intervene in the equity markets. The majority of central bankers, however, certainly would. The Fed professes to have resisted the siren call of buying private assets, but unlike Jason (of Argonaut fame), the Fed is unrestrained to any mast. It intervenes indirectly by flooding money into the system on an industrial scale during market stress. As bearish Matt King of Citigroup says, “we are fighting all CBs, not just the Fed.” The head Ewoc, citing the work of leading economists—sheesh—appears to be planning to go to the Dark Side to buy equities. Entering a wormhole—an event horizon—into the NIRP nebula is dangerous. Yellen estimates that “overcoming the effects of the zero lower bound during a severe recession would require about $4 trillion in asset purchases.”
“We do not target the level of stock prices. That is not an appropriate thing for us to do.”
~Janet Yellen, FOMC chair
“It could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.”
~Janet Yellen, suggesting inappropriate things
“It seems that the poor would have been better off if the Fed had done more to support asset prices.”
~Narayana Kocherlakota, former president of the Minneapolis Federal Reserve
That is some serious neofeudal thinking. The poor are saddled with a heap of underpriced assets? Multiple Fed governors have discussed unconventional methods that include NIRP, more QE, and a variety of tricks that are well documented at xHamster.com. Helicopter money—a construct of Milton Friedman—involves making everybody richer by just handing over money directly via metaphorical helicopter drops. (Pause for chuckling to subside.) Loretta Mester of the Cleveland Fed said that it “would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.” You’ve been accommodative enough, Ms. Mester.
“If we had a lot of good news and we got into the September meeting and other people wanted to go, I could support that—but again I’m talking about one increase and no planned increases after that.”
~James Bullard, president of the St. Louis Federal Reserve, on a rate hike
The Fed has managed to pull off one rate hike in 10 years, prompting Steve Liesman to pronounce, “I think the first rate hike cycle is over” (face in palm). What are they waiting for? There are two impediments. First, they are “data dependent,” which is a euphemism for a highly reactionary policy that responds to every sneeze and sniffle of the U.S. or global economy as well as events that have nothing to do with economics. They tapped the brakes on rate-hiking plans with Brexit as well as after a “plunge in stock prices” in March, when Punxsutawney Phil died in February (“distortions you can only see after the fact”—Phil’s shadow), and after “the market reaction to April FOMC minutes,” which “convinced the committee to do nothing after all.” Jerome Powell at Jackson Hole (A-Holes at the J-Hole) urged, “We should be on a program of gradual rate increases. We can afford to be patient.”
Yellen noted that the “best policy now is greater gradualism.” Bloomberg announced that “Federal Reserve officials signaled a slower pace of rate increases.” One 25-basis point hike in 10 years—2.5 basis points per year—and they need greater gradualism? These guys are the Ents in Lord of the Rings. They hear the Ghost of Christmas Past (1938), when the Fed popped an equity bubble it created owing to seriously dubious attempts to pull us from the Great Depression2 and scrooged the economy. The countdown-clock LEDs are flashing, and these folks won’t know whether to cut the red wire or blue wire. “Not a problem: we’ll just wait for more data.”
“The FOMC has degraded itself to becoming a slow moving newswire providing updates on the market environment every 6 weeks.”
~Michael O’Rourke, JonesTrading
The second impediment to Fed movement is its detractors. Clean the snot off your screen and stay with me here. The Fed has been so ridiculed that it will do anything to avoid a cacophony of I told you so’s. They look at Greenspan and think, “I don’t want to be stuck with that clown’s legacy.” Who are these detractors who question The Great Oz’s too-low-for-too-long policies demanding they “Put ‘em up”! Put ‘em up!? The Joe Sixpacks of finance like Rick Santelli suggest the Fed buying stocks will “completely and utterly and in every possible way destroy value in the marketplace.” Albert Edwards of SocGen notes that “these central bankers will destroy the enfeebled world economy.” There are some, however, on the Fed’s own team questioning their sanity:
“The conduct of monetary policy in recent years has been deeply flawed. . . . The Fed’s mantra of data-dependence causes erratic policy lurches in response to noisy data. Its medium-term policy objectives are at odds with its compulsion to keep asset prices elevated. Its inflation objectives are far more precise than the residual measurement error. Its output-gap economic models are troublingly unreliable. . . . it expresses grave concern about income inequality while refusing to acknowledge that its policies unfairly increased asset inequality. . . . Citizens are rightly concerned about the concentration of economic power at the central bank.”
~Kevin Warsh, former Federal Reserve governor, commenting on the Federal Reserve
“What The Fed did, and I was part of it, was front-load an enormous market rally in order to create a wealth effect . . . and an uncomfortable digestive period is likely now. . . . I question if it is sound policy to remove all uncertainty or volatility from the market.”
~Richard Fisher, former president of the Dallas Federal Reserve
Until the next crisis, they are working the Shake Weights and brandishing Fleshlights in their fortress made of sofa cushions. In the interim, from within their lair, they came up with the fabulous idea of launching a Facebook page,254 which promptly got eviscerated.255 The American Banker proclaimed “this PR attempt was such a debacle.”256 Nobody thought to #askJPM? I am sure their newest, remarkably simple trick for energizing the economy will work . . .
NB-That “. . .” thingie, by the way, is called a semaphorism, which suggests you have even more to say but…
“I sympathize with savers, but jobs must come first.”
~Andrew Haldane, Bank of England
“The ECB’s attempts at reflating the economy, while admirable, have failed.”
~Willem Buiter, Citigroup
“Monetary policy has reached its limits. . . . We have tried everything in the last six years via central bank policy to stimulate demand, and we haven’t succeeded.”
~David Folkerts-Landau, chief economist at Deutsche Bank
“The capital asset pricing model is being broken—smashed to pieces—as a matter of deliberate policy.”
~Robin Griffiths, chief technical strategist at ECU and previously at HSBC
“I think we’re at the cusp of a bear market in both stocks and bonds that will last up to thirty years. . . the central banks are all acting in unison, so once this bubble pricks it’s going to be pretty terrible.”
~Milton Berg, CEO and founder of MB Advisors
There have been almost 700 rate reductions globally since the Lehman failure.257 Maybe another 700 will finally bring it home, but the skeptics say no. I collected 15 pages of notes on European central bankers, and I realized that they were 80% scorn from detractors.
Central bankers-turned-metaphysicists proffer models and theories that cannot be refuted because they all include provisions for interventions until they work. Period. Foreign central banks have bought most of the U.S. treasuries to inflate this bond caldera.258 They are printing money ex nihilo (out of nothing), but it doesn’t stop there. Walls of money with no organic demand keep dying companies alive to parasitize viable companies. Wealth creators, the folks we should be focusing on, have no idea how to use the credit. Money velocity has plummeted because the oceans of liquidity are not moving. Mervyn King, the Baron of Lothbury and former governor of the Bank of England, calls the short-term gains at the cost of long-term pain the “paradox of policy.” Paradoxes never obstruct metaphysicists peddling their bullshit.
“Buying Junk Shows ECB Is Getting Desperate”
~Bloomberg headline by Mark Gilbert
“The world’s central banks can’t save us anymore. . . . The trade now is to hold as much cash as possible.”
~Nikhil Srinivasan, chief investment officer for a European insurer
Super Mario Draghi, head of the European Central Bank and ringleader of the Eurowankers, banged out $90 billion a month—$1 trillion a year—in bond-buying QE.259 Mario went full monetaristic BDSM by announcing a corporate bond-buying program. It’s not hard to imagine that politically connected megacorporations are megabenefactors. Before a single bond was purchased, corporate bond prices soared (yields dropped) as speculators Hoovered up the extant supply.260 The banks helped them create new offerings to sell to Mario.261 With a dollop of delusion, one might justify a little blue-chip QE, but Mario went straight to the junk bond market—steamy piles of Eurodregs.262 Mario has even bought bonds directly from the companies—private placements.263 I’m sure Friends of Mario did quite well.
“Long-running rallies in stocks and bonds are reliant upon continued support from central banks.”
~Jon Hilsenrath, Wall Street Journal
“There is a clear case for stimulus and stimulus now.”
~ Mark Carney, governor of the Bank of England
Bank of England took a culinary approach—threw in the “kitchen sink”—by cutting rates to a record low 0.25%, boosting QE, and announcing corporate bond purchases.264 Not to be outdone, SNB began printing money and buying U.S. equities.265 Think about that one: it created counterfeit money to buy U.S. corporations. Oddly enough, SNB is a GSE like Fannie Mae and Freddie Mac in that a minority ownership trades as shares publically.266 Because it’s pushing up shares of the stocks it’s buying (shades of Janus during the tech bubble), the shares of SNB are up as well . . . for now.
“The basic idea is that the central bank can put essentially anything on its balance sheet, and there is no reason to be straight-laced about this.”
~Stefan Gerlach, chief economist at BSI Bank and former deputy governor of Ireland’s central bank
“It is finally obvious that central bankers are neither gods, nor magicians, nor even doing ‘god’s work on earth’, but plain and simple psychopaths.”
Helicopter money refers to the giving of money to the populace and has been expanded to include direct debt monetization. Somehow it is viewed as different from the monetary napalm described above, but I can’t see it. Regardless, Deutsche Bank predicts the choppers will be fired up in the next recession and then waxes optimistically.267 These trial balloons are all designed to soften our brains to the point of acceptance. The head of Riksbank has discussed it.268 Bernanke has discussed it in the context of “perpetual bonds” (no maturity date). I suspect even normal bonds will fail to reach their maturity date . . . the hard way. Helicopter money marks the end of the road to perdition. How pundits talk about it without calling “bullshit” is beyond me. Bank of England economists advocate for central banks to issue their own digital currency.269 Ummm . . . I think they already have.
“This will be the year that ‘gravity’ will overwhelm the central bank policies.”
~Stephen Jen, co-founder of SLJ Macro Partners
“The elites are not the problem; the people are the problem.”
~Joachim Gauck, president of Germany
George Friedman, the founder of Stratfor, is the Stephen King of geopolitics. In his latest thriller Flashpoints (see “Books”), he describes Europe as an eclectic mix of sovereign states—tribes if you will—separated by volatile borderlands. Borderlands are like the bars in Star Wars movies. The singular goal of Europe since World War II has been to not massacre each other again. The Tribes of Europe have a long history of warfare and long memories. In lieu of a durable unification, we get conflagration.
Current problems emanate from sagging economies. Unemployment in the Club Med southern region is soaring. Attempts to solve this problem with monetary policy have created €1 in GDP growth for every €18 of QE.270 That’s what you get trying to print your way to prosperity. Skirmishes between sovereigns and the companies of their opponents are now common, putting megacorporations like Apple, Volkswagen, and Deutsche Bank in the crosshairs. Walls are going up across Europe whether European Unionists like it or not.
The president of the European Commission, Jean-Claude Juncker, has decided to teach European youth the principles of integration Brussels-style.271 It will mobilize unemployed youngsters to volunteer for civic projects across the continent: “Youngsters would also be drafted to help police the migrant crisis.” I’m guessing they’ll be given “brown shirts” to wear.
France’s far-right National Front party leader and strong poller for the 2017 presidential election, Marine Le Pen, said “I believe that the European Union is in the process of collapsing on itself for one simple reason. The two pillars on which it’s founded—Schengen and the euro—are in the process of crumbling.” She went on to say Hillary would be a disaster, but the Yanks solved that problem for her. A few pissed-off French protested against new anti-worker laws that are designed to protect and enrich the wealthy elite at the expense of ordinary people.272 Here is a picture of them singing “Kumbaya” (in French, of course):
Christine Lagarde, head of the International Monetary Fund (IMF), is facing charges in France for embezzlement and a £315 million kickback to a buddy.273 She could get a decade in prison. Maybe France is cleaning out the Augean stables, but it sounds hauntingly similar to the execution-style exit of the previous IMF head, Dominique Strauss-Kahn, on a rape charge.274 Old-school Russians are familiar with this form of transfer of power.
Greece never seems to get a reach around by its more powerful partners in Europe. This year, a WikiLeaked plan of the Troika to elicit a Greek credit crisis left the Greeks feeling violated.275 There are rumors of a wealth tax to solve the problems, but the country has little tradition of tax collection.276 Historically, it has been a lot easier to borrow what’s needed. Greece is usually in default and perpetually in ruins.
The Swiss had a referendum to vote themselves richer. Why didn’t I think of that? In any event, they wanted guaranteed income sans work—up to $90K per year for a family of four.277 Sounds like a Karl Marx–Robin Hood–Paul Krugman combo platter. Amazingly, they voted it down.
Of course, Germany is always at the center of any European event. The year started off edgy when authorities suggested citizens stockpile food and water “in case of an attack or catastrophe.”278 The authorities muttered a few things about “bringing back nationwide conscription in times of crisis to . . . defend NATO’s external borders.”279 I betcha sauerkraut has quite the shelf life. Volkswagen got a serious dose of Fahrvergnügen by cheating on its emissions test.280 Of course, no other manufacturer did this, said nobody.
You thought I forgot about Brexit and the refugee crisis? Sheesh. These get their own sections.
“Brexit is a reminder some things just shouldn’t be decided by the people.”
The British exit from the European Union—the omnipresent Brexit—may either prove to be a historically profound event or illustrate that events are rarely profound. Brexit seems so logical. The Limeys had one foot out the door by not signing onto the euro currency regime in the first place. Hundreds of CEOs argued sovereignty has is merits.281 As the vote approached, European banks were circling the drain, and a refugee crisis that does look profound (vide infra) had caused unusual immigration patterns in Great Britain. Why the hell wouldn’t you grab the first lifeboat? Demographics had a familiar ring: country folk wanted to leave, whereas the so-called “remains” were largely in the cities. John Authers of the Financial Times described it as “the breakdown in trust . . . a revolt of the masses . . . one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer.” Populism is used by establishment thinkers to describe people they do not understand.
The prophets of doom denounced Brexit as the end of the civilized world. According to George Soros, “If Britain leaves, it could unleash a general exodus, and the disintegration of the European Union will become practically unavoidable.” Of course, George is a globalist hankerin’ to shape the world.282 European Council President Donald Tusk feared that “Brexit could be the beginning of the destruction of not only the EU but also of western political civilization in its entirety.” Sounds bad.
Most global elites seemed confident, but the thumb screws were being cranked on the Brits. The French threatened to empty “The Jungle” (refugee camps) into Britain (wrapped in Ebola blankets).283 President Obama noted with respect to trade that “the UK is going to be in the back of the queue” and that a UK/U.S. trade agreement is “not going to happen anytime soon . . . not because we don’t have a special relationship.”284 Very special. Next time the U.S. wants a partner to bomb Middle Eastern countries for no apparent reason, I’m not sure the Brits will be so willing. Also, whaddaya bet President Trump has other plans? Jean-Claude Juncker promised, “I’m sure the deserters will not be welcomed with open arms”.285 I bet he can spell douche without using Google.
On the night of the vote, British elites watched at the headquarters of the European Commission with a Clintonesque cautious optimism. Also in a Clintonesque fashion, the mood changed, and the tears started. The hooligans voted Brexit! Google reported a post-vote spike in UK-based searches for “What happens if we leave the E.U.?” as well as “What is the E.U.?” Seemed a little late for that.286
The financial consequences were immediate and titanic. European bank shares got clubbed 24% in two days. RBS and Barclays dropped 37% and 34%, respectively.287 Two trillion dollars got wiped off global equity markets.288 The vote occurred at the start of a 45-day quiet period in which companies were not allowed to manipulate their share prices with buybacks.289 The pound got clobbered—pounded even—11% to a 30-year low.290 Now I’m confused: doesn’t modern Bad News/Good News (BNGN) economic theory say that destroying your currency will stimulate your economy? Bank of England Governor Mark Carney lowered capital requirements (lowered the cash buffer) to keep credit flowing, ironically at the precise moment a bank might need a cash buffer.291 Various central banks stood ready to unleash ungodly sums of money to constrain the free market from true price discovery.292
“The genie cannot go back into the bottle. The patient has already passed away.”
~Geert Wilders, founder of the Dutch Party for Freedom
Within a few days, the first bank keeled over.293 A few property funds collapsed within a week.294 In the spirit of never letting a crisis go to waste, Italy announced a €40 billion rescue of its financial system as Italian bank shares collapsed.295 There were also calls for a moratorium of so-called bail-in rules and bondholder write-downs. Bail-ins and write-downs are fine, but only in the abstract.
Longer-term effects are not predictable. Many are apoplectic. I am not convinced. In the shorter term, walls of money from central banks have generated hellacious equity rallies that are commonplace when bankers get nervous. The architects of Brexit, Nigel Farage and Boris Johnson, bailed on the whole game, writing “former politician” on their résumés.296 Nigel is rumored to have muttered, “We broke the eggs; you make the omelet.” He is also looking at U.S. real estate. Author Stephen King is rumored not to know the ending of a novel until he gets to it. Sounds like Brexit.
“I believe we are witnessing a popular uprising against failed politics on a global scale. . . . It is the same in the UK, America and much of the rest of Europe. The little people have had enough. They want change.”
~Nigel Farage, British politician
I was amazed that Brexit happened; the people outvoted the elites. But then I had a passing thought: maybe the authorities did want Brexit but needed an excuse—a patsy. The younger generation wishing to remain accused the old guard for selfishly ignoring the future.297 I think the old coots might disagree.
“I am delighted to welcome you. Scotland is now your home, and we are privileged to have you here. I hope you find the peace and safety that you need to rebuild your lives.”
~Nicola Sturgeon, first minister of Scotland to the refugees
“The outlook is gloomy. . . . We have no policy any more. We are heading into anarchy.”
~Jean Asselborn, Luxembourg’s foreign minister on the refugees
I find the refugee crisis in Europe to be paradoxical on so many levels. Most European countries are nations of immigrants. In historical battles of “us” versus “them,” their ancestors were, at one point, “them.” But that was then, and this is now. The crisis appears to be a true existential risk for many institutions within the European Union. The magnitude is breathtaking. German authorities estimate that up to 3.6 million refugees will enter Germania by 2020.298 Handfuls (thousands) have been positioned for deportation, but even that is on hold.299 The solutions often seem morally or politically untenable. There are no simple or safe paths forward. Of course, this too shall pass—everything does—but sometimes living through historical events sucks. One pithy Norwegian referred to this clash of cultures as “Odin versus Allah.”300 The notion of a Norwegian Crusade was unthinkable.
“We all underestimated a year ago what would come upon us with this big refugee and migration movement.”
~Jens Spahn, Germany’s deputy finance minister
It is hard to assess the magnitude of the violence—the media is known to overstate such things—but the images of refugees assaulting Europeans and the entropy at the street level are vivid.301 A hotel bell captain described his horror: “These people that we welcomed just three months ago with teddy bears and water bottles . . . started shooting at the cathedral dome and started shooting at police.” New Year’s Eve attacks in Cologne by thousands of “Northern Africans” are believed to have been organized non-spontaneously.302 Immigrants razed a hotel that had been converted to an asylum center because they “didn’t get a wake-up call for Ramadan.”303 A compendium of assaults tied to the recent wave of immigrants gives you a feeling for what Europe may be confronting.304
As usual, authorities offered calming voices. “Islamist terror in Germany wasn’t imported with refugees,” assured Angela Merkel. She has taken on the politically challenging task of supporting the process:
“For me it is clear: we stick to our principles. We will give those who are politically persecuted refuge and protection under the Geneva Convention. I cannot promise you that we will never have to take in another mass wave of refugees.”
~Angela Merkel, chancellor of Germany
As you might expect, the pushback has been equally determined. French citizens blockaded Calais, demanding the demolition of the migrant Jungle camp.305 Germany ran out of pepper spray after a 600% increase in sales,306 although it is unclear how well Mace works in a mob. Rampaging teen refugees in Sweden were met by angry Swedish men.307 That probably left an impression as the Swedes tapped their inner Vikings.
“Extremism is growing everywhere. . . . We are on the brink of civil war.”
~Patrick Calvar, chief of France’s Directorate General of Internal Security
Of course, the next step is nationalism. The Schengen area—the 26 European countries that have abolished border controls—is said to be at risk as border checkpoints to curb refugee movements are being put into place. Walls go up; goods and services cease to move seamlessly. French far-right leader Marine Le Pen promised an Islamic crackdown and a “Frexit” referendum as she launched her bid to be president.308 Hungarian voters rejected Brussels’ quota of refugees but failed to meet the 50% quorum.309 I’m not sure the refugees will be met with teddy bears this time. Horst Seehofer, Bavaria’s prime minister, suggested the refugee problem “is too big. . . . [A] solution thus far [is] unsatisfactory. Restrictions on immigration are a condition for security in this country.” The Greeks, still upset that the IMF plotted an existential “credit event”, is “tasked with one of the most complex and legally dubious international border policing missions in modern history.” It’s looking for some debt relief to play along.310
“Regaining control of our borders is an existential issue for our culture and the survival of our society.”
~Thilo Sarrazin, German central banker and a former member of the Social Democratic Party
The economic failures are difficult to assess but acute in some countries. Recall that the 200,000 Goths swarming across the Danube did not sack Rome; they overwhelmed it. Northern Europe is getting seriously whacked. Muslims are roughly 5% of Belgium’s population yet consume 40–60% of its welfare budget.311 The 92% male refugees (some 20- and 30-somethings claiming to be children)312 in Sweden are an enormous financial hardship. Sweden’s tourism industry has been crushed as hotels have been converted to refugee hostiles (errata: hostels).313 Of course, cottage industries designed to pick up the government giveaways are flourishing.314 Merkel is taking heat for encouraging German companies to hire refugees.315 Germany took 1.5 billion euros—1,000 per refugee—from the public health care fund (10 billion euros in total) for refugee assistance.316
What about the U.S.? Can’t we relieve some of the pressure? We are, as many like to say, a nation of immigrants. This is another paradox for me. I have openly blamed U.S. foreign policy for causing this problem. Our Crusades in the Middle East are destabilizing. However, and this is a very big however, immigrants of yore came here looking to embrace the American dream. The idea of bringing angry 20-something men we just bombed the crap out of strikes me as demanding an extra layer or two of checks and balances at the border. Of course, I’m sure our new president has strong opinions on immigration and even a few tweets up his sleeve:
“All Americans, not only in the states most heavily affected but in every place in this country, are rightly disturbed by large numbers of illegal aliens entering our country. The jobs they hold might otherwise be held by citizens or legal immigrants. The public services they use impose burdens on our taxpayers. . . . We will try to do more to speed the deportation of illegal aliens who are arrested for crimes, to better identify illegal aliens in the workplace. . . . We are a nation of immigrants, but we are also a nation of laws. It is wrong and ultimately self-defeating for a nation of immigrants to permit the kinds of abuse of our immigration laws we have seen in recent years, and we must do more to stop it.”
~Donald Trump, president elect
I was just messin’ with ya. Those were excerpts from Bill Clinton’s 1995 State of the Union Address.317
Unbeknownst to many, we are already accepting Syrian refugees piecemeal. A local Ithaca diocese has agreed to sponsor 50 in Ithaca alone.318 The question I still find myself asking is blunt, even a bit raw: if this doesn’t work out well—if, for example, the lovely walking mall in downtown Ithaca becomes a no-go zone like those in Sweden—will that diocese fix the problem? Recall the woman who adopted a Russian orphan—undoubtedly one whose biochemically induced sociopathy would glow on an fMRI scan—and sent him back to Russia? Her name was Mud.
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