Category Archives: Economics

Back Of The Envelope

I saw this post on zero hedge. It has obvious weaknesses – it confuses flows and levels, and ignores the change in private sector debt which is no different than public debt.

So with the help of FRED, I did a few numbers on the period 1/1/1997 to 1/1/2017. For that period, the increase in debt level contributed about 26% of the increase in GDP. I included consumer debt, corporate debt and government debt. I simplified to a linear increase in GDP. Bottom line, if debt had held steady, GDP would be reduced by about 15%.

All this says is yup, government deficit spending and easy credit pump up the economy. Until the defaults start, anyway.

That Which Is Not Seen

Alhambra Partners

After tax, corporate profits are still slightly less in Q2 2017 than in Q4 2014, and barely more (+3.4%) than in Q1 2012 five years ago.

SocGen’s Albert Edwards:

Our Ice Age thesis has always called for US and European 10 year bond yields to converge with Japan. We still expect that to happen, with the downward crash in US yields likely to be particularly shocking. There is mounting evidence that underlying US CPI inflation has already slid into outright deflation in exactly the same way that Japan did seven years after its credit bubble burst. Hence we repeat our call for US 10y bond yields to ultimately converge with Japan and Germany at around minus 1%.

In short, stocks are grossly overvalued and Treasury bonds are similarly undervalued. Not news, of course, just some confirmation bias.

Extreme Crazy

I was going to say Peak Crazy, but we all know things can always get crazier. Some things that spring to mind.

Political craziness: Mob violence on left and right, blatant defiance of federal law by city politicians, attempts to rewrite or at least deny history, demonization of Trump, Putin and anybody associated with them, and so on. Immigration in Europe – it’s that 4.7 kids per woman in Africa that nobody dares to talk about. Not to mention the crazy fat kid.

Fiscal craziness: Federal funding of runaway price increases, notably in university tuition, prescription drugs but also many other subsidized goods and services. Gross under-funding of state and local pension schemes even under ludicrous assumptions about future returns.

Monetary craziness: Central banks threatening to tighten but pumping away, consumer credit at record highs in US and elsewhere (Canada, that’s you I’m talking about with highest household debt in the world), government deficits keep growing. Subprime crdiet still gowing while defaults rise. Most of all, ICOs. People pouring money into blockchain-based tokens. Really?

Market craziness: Housing bubbles in China, Canada, Australia, UK and some US cities. Massive (record) risky speculation in many markets – short vol, long crude for example. Setups (risk parity) similar to portfolio insurance (remember 1987?).

I could go on. But I won’t. I’m just grumbling while I wait.

Fed Folly

Lacy Hunt from Hoisington Management.


Janet Yellen today:

“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

Seriously? If nothing else, the coming pension tsunami virtually guarantees it. It is truly scary that this powerful person seems to live in an alternate universe.


A Bit Of Math

Simon Mikhailovich of Tocqueville Bullion Reserve reminds us of the deadly numbers with a sobering tweet:

A bit of math. With the global debt / GDP ratio at 320% and the cost of average debt service at 2%, it takes 6.4% growth per annum just to service the debt. Not happening.

Consumer Prices

Everybody has a bias when it comes to measuring price inflation. Reports like the Devonshire one come out quite frequently, usually complaining that the government indexes understate inflation. They all say, well the numbers don’t reflect reality. The problem is, they don’t know what reality is any more than the government does. My reality and the next person’s are completely different because we buy different things. Cheap loans have allowed universities to raise prices in an outrageous fashion – but our kids have long since graduated so it doesn’t affect me, although anyone putting kids through college is being eviscerated. Consumers react to prices. Technology changes. Quality changes. Fashions change. And so on. All these things make any index pretty much useless, except for making political arguments. So one has to ask, in the famous words of Ms. Clinton – “What difference does it make?”

If you ask someone in Venezuela right now, of course, you would get an expletive for an answer. There is massive consumer price inflation because there are not enough consumer goods to meet demand, and so people are going hungry and without toilet paper. They are driving up prices, trying to outbid one another to compete for what little supply there is. But even in that desperate situation, there is no agreement on what consumer prices actually are, even by disinterested parties. The only way to fix the problem in Venezuela is to get goods back on the shelves. If the Venezuelan government can do that, then consumer prices will reflect the value of the bolivar and general world price levels.

There’s your clue. If you want to measure consumer prices, it is easy. Just use the Big Mac, as the Economist does. It works. 2016 USA Big Mac price inflation was 2.6%. Venezuela Big Mac prices in bolivars:

July 2014: 75

December 2014: 245

July 2015: 485

December 2015: 940

December 2016: 3550

Looks like a pretty decent metric. It tells you what you need to know – there’s a big problem.

But the economy does not run on Big Macs, and I’m interested in the inputs, not the outputs so much. And those are labor and energy. Nothing else much matters.

The End Of Volatility?

This morning, the VIX has a 9 handle. The stock market has gone 8 days without a move of more than 0.2%. Buffett, Grantham and others are arguing that this time really is different. In fact, they agree that the market has reached a permanently high plateau, although they do not dare us those words. Who are these people and what have they done with Warren Buffett and Jeremy Grantham?

Of course it is different. It is always different. History never repeats itself. In the first four months of 2017, according to Bank of America, central banks – mostly the ECB and BoJ – purchased more than $1 trillion in securities, a record rate. So of course that means blue skies forever.

And that blue sky is full of tree-tops. As the Chinese proverb goes, this too will pass. That massive liquidity pumping is not benign, it is a symptom of panic as economies refuse to respond to the therapy the bankers prescribe.

As John Hussman observes, these signs and portents are a call to lace up the gloves, not hang them up. Extended periods of low volatility and excessive bullishness are always followed by the converse. Commodities and trade are quietly collapsing, GDP barely has a heartbeat and subprime defaults are rising, especially in cards and autos, pension funds are struggling, valuations are beyond extreme.

Beware the gathering storm.

Fed Day

Fed says the economic weakness is “transitory.”

I say “We’ll see about that.” Of course, if “transitory” is referring to geological epochs, then I’ll agree.

The End Of Hope

I had hoped that Donald Trump’s presidency would see some change in Washington. The attack on Syria finally dashed this hope.  The neocons’ campaign to demonize Russia has shaken his confidence to the point that they are now back in charge. This is a catastrophe, for which there is no one to blame but Trump.

Almost as seriously, presumably at the urging of the Goldmanites, he has not only failed to even attempt to slow the financial bubble, of which his pre-election statements show he is well aware, but has cynically relished it as proof of his success. This failure is likely to be his downfall.

We are so screwed. Sauve qui peut.