There is no escaping the fact that things are not getting better. If anything, they are getting worse. Following the recent large swings in financial markets and reading the commentary in the press, it strikes me that there is still a surprisingly strong belief out there that our fate is in the hands of the policymakers, who presumably still have it in their power to make things better for the economy. How can they do this?
Well, expect nothing new on here. Mainly by the time-worn strategy of lowering official interest rates again – where this is still possible – or by injecting more fiat money into the system through fresh loans to the banking industry or by yet another round of debt monetization. Talk about the laws of diminishing returns!
The only reason I could find in the finance commentary for why equity markets rallied last week was that the prospect of another dose of cheap money had appeared on the horizon. A week before, on June 1, a rather dreadful employment report in the US – which, like all statistics, should not be taken at face value but treated with the utmost caution – had poured cold water over the notion of a self-sustaining recovery and instantly seemed to pull the rug from under the equity market.
Then the usual pattern unfolded. “Wait a minute,” the markets seemed to say collectively, “a weakening labour market in the US is just what is needed to tip Ben Bernanke over the edge and cause him to engage in another round of ‘quantitative easing’.” And that was the basis for the rebound in global equities this week.
Please deceive me!
QE is, according to Bernanke’s own explanation, a policy tool that aims to improve the public’s sentiment and to cajole it into additional economic activity via the targeted manipulation of asset prices. For example, high equity markets usually make the economy appear healthy and are thus bound to make businessmen and women more optimistic.
In a free market, low interest rates usually signal the availability of a large pool of voluntary savings that desires to be invested and to be translated into productive assets. But in the absence of a healthy economy that lifts equity markets, and in the absence of savings that can be used for true capital formation, a mirage of health and savings and capital can still be generated with the help of the printing press.
QE, again by Bernanke’s own admission, is a giant placebo: It is not true medication as it evidently does not address the economy’s fundamental ills, but a tool for nationwide mass hypnosis. It is a kind-of anti-depressant, a kind of monetary Prozac.
Well, these are the policies that have been run on an unprecedented scale for a number of years now. To say they have been without effect would be wrong. As I see it, they have had numerous effects. But they certainly have not ended the crisis. What were the effects then?
* Monetary accommodation has manufactured the occasional rally in ‘risk assets’ but these have usually been short-lived. After all, there still exists an unbridgeable gulf between an artificial rally created with injections of new fiat money and a re-pricing of productive assets in response to positive fundamentals.
* The policy has allowed many banks to stay in business and thus hindered a recalibration of the banking industry;
* The policy sabotaged the redirection of scarce capital from the bubble-industries that had benefited from the credit boom toward new, productive and more sustainable employment in other sectors;
* It sustained an overstretched financial industry a tad longer;
* It allowed governments to run big deficits and accumulate more debt;
* And by mis-pricing the cost of capital further it has most certainly directed entrepreneurs into areas that will prove to be disaster zones once the flow of cheap money slows.
If you believe – as I do – that large-scale mis-allocation of resources and substantial mis-pricing of assets (both the result of the extended credit boom that popped in 2007) are at the core of the present malaise, then you may agree with me that monetary accommodation (QE and all that sort) will not only make the economy not better, it actively hinders the healing process. And it does so by providing a temporary placebo that seems to quickly lose its effectiveness.
Why so optimistic?
So, I ask myself, how can the prospect of another ECB rate cut or QE3 or QE4 from the Fed really make those hardened investment professionals more optimistic? I wonder, is their ostentatious enthusiasm for these deceptions genuine or is it some cynical ploy to offload ‘risk assets’ into the next artificial and short-lived rally and to then hunker down in anticipation of the unavoidable collapse? Is the apparently unfailing belief in the ultimate power of money-printing and ‘monetary stimulus’ not a sign of desperation rather than a rational assessment of a very messy situation?
Maybe they believe, with Paul Krugman, who appears very genuine in his pronouncements, that the next $2 trillion of new money from the Fed will achieve what the last $2 trillion obviously didn’t. Or that the next 30% in government debt will do what the previous 30% didn’t. That is, it will cut through some imaginary, collective psychological knot and allow us all to be more productive. I don’t believe it and I am puzzled by the explanations and arguments that I read.
In particular, I am surprised by how much observers appear to be willing to twist the notion of the capitalist economy to be able to squeeze a modicum of optimism out of the prospect of even more blatant government intervention. I wonder if there is not some self-deception involved.
Here is an interesting quote from this morning’s Financial Times, explaining why China’s surprise rate cut yesterday was a reason for optimism:
“‘We believe that the rate cut will be effective in meeting the short-term objective of getting credit and the economy moving,’ said Mark Williams at Capital Economics. ‘There could be no stronger signal that policy makers are focused on growth. That alone should prompt more activity at the large state-owned sector.'”
Well, hooray for that!
I do not know Mr. Williams and I have no intention of criticizing him personally. I only quote him here because I think that his brief statement is an excellent representation of what must be the economic belief system of those who manage to derive optimism from these policy announcements.
Do people really believe that the ingredients for a well-functioning economy and a sustainable recovery are credit expansion based on printed money rather than savings? Or that interest rates ought to reflect the priorities of policy-makers rather than the interaction of savers and borrowers on markets? And that more activity from a largely state-owned sector — which readily transmits the wishes of policy-makers — is a good basis for a prosperous economy?
Again, I am not even implying that this is Mr. William’s view. It may well be that all he was trying to say was that these measures were bound to boost GDP statistics in the short term. And I agree with that. Chances are we will get a growth blip in China as a result.
But so what? Big deal. This is no reason for real optimism. Does it mean that we have turned the corner in this crisis? No.
(In fact, every component of this quote makes me bearish on China’s medium-term outlook: easy money, ‘get credit moving’, large state-owned sector. What is not to dislike about this toxic mix?
Since the financial crisis started China has expanded its money supply in the M2 definition by about 90%, or more than 13% per annum. In this it was greatly assisted by an obedient state-controlled banking sector that understood that the policy makers were focused on growth. Such monetary stimulus is always good for one thing: blow a few bubbles.
On many measures China’s real estate boom has gone further than the one in the US prior to 2006, and is more similar to the one in Japan in the 1980s. And how well that ended!
I am no expert on China but all I am saying is this: what precisely should I get optimistic for? Cheap money for the large state-owned sector?)
No safe havens, sorry.
We are in a proper mess and I am sorry to say there are no painless exits, there are no cheap assets and there are no safe havens. Gold remains my favourite asset because it is something that has maintained wealth for a long time and it cannot be printed by Bernanke and not issued en masse by Geithner.
Yet, as I explained last week in detail, gold is not cheap. I believe its price already reflects the expectation that the Fed will print vast amounts of additional dollars and that an inflationary endgame to the global economic malady has a high probability.
I don’t call it a bubble because so many things are actually pointing in the direction of such an outcome. Yet, any reluctance on the part of Bernanke to use the printing press more aggressively – and I believe he has good reasons to be cautious – is likely to depress the premium in the gold price over gold’s long run PPP. It is not an easy trade.
I think the recent volatile price action in gold supports this interpretation. When the poor labour report came out on June 1, gold enjoyed its biggest one-day rally in more than 3 years, evidently in expectation of more central bank activism. But then with Bernanke appearing reluctant in his testimony on Wednesday to prepare markets for another round of debt monetization, gold retreated quite sharply.
Gold is the eternal alternative to state fiat money. It is not surprising that it has now become predominantly a play on the probability of the Fed ultimately pressing the monetary nuclear button. But any gains in the so-called ‘risk assets’, such as equities, now seem to be driven not by any fundamentally justified optimism on the real economy but, too, by the prospect of another dose of monetary Prozac.
I am not sure if Warren Buffett and Charlie Munger of Berkshire Hathaway appreciate the irony here. But the ‘unproductive and uncivilised’ asset ‘gold’ that they so detest, and the ‘productive and civilised’ assets ‘equities and farm land’ that they so prefer, are presently driven by the same forces. After so much policy intervention nobody knows what the ‘real’ prices of these assets should be anyway but it seems to me that without the prospect of ongoing and constant fiat money debasement nobody can justify the nominal prices of any of them.
Pingback: Prozac-Craving Markets « Financial Survival Network()
Pingback: Prozac-Craving Markets « Silver For The People – The Blog()
Pingback: fast bridging finance()
Pingback: bad credit lender()
Pingback: personal loan bad credit()
Pingback: check this()
Pingback: bad credit loans()
Pingback: I need Katy Tx air conditioning repair heating Call for air conditioning repair Sugar Land()
Pingback: buy ambien us()
Pingback: See Beautiful Interior Examples()
Pingback: Amazon.com Smith & Wesson Delta Force Tactical Flashlight()
Pingback: healthy teeth()
Pingback: Forex Strategy Master, Forex Strategy Master discount, Forex Strategy Master review, Forex Strategy Master bonus()
Pingback: ulteriori informazioni()
Pingback: Lathrop CA()
Pingback: cell phone jammer()
Pingback: click now to learn even more()
Pingback: mark mania()
Pingback: action furnace()
Pingback: chase bank()
Pingback: view video()
Pingback: universal remote()
Pingback: will disputes inheritance act 1975()
Pingback: handy orten()
Pingback: find out()
Pingback: Mirena Removal()
Pingback: davinci lawsuits()
Pingback: web design Los Angeles()
Pingback: Neomi Hussey()
Pingback: Louis Sandate()
Pingback: Rory Oger()
Pingback: Р‘Р°С€СѓС‚РёРЅ С„Р°РјРёР»РёСЏ РєР°РєРѕРіРѕ РїСЂРѕРёСЃС…РѕР¶РґРЅРµРЅРёСЏ - Р§С‚Рѕ РѕР·РЅР°С‡Р°РµС‚ С„Р°РјРёР»РёСЏ РђРІРёР»РѕРІ()
Pingback: legal aid inheritance act 1975()
Pingback: Kam Dowd()
Pingback: Karyl Harrod()
Pingback: Neil Licano()
Pingback: Amos Hilsendager()
Pingback: best online backup()
Pingback: biggest trucks()
Pingback: great business ideas()
Pingback: deezer gratuit()
Pingback: workouts for quarterbacks las vegas()
Pingback: college recruits 2014()
Pingback: longchamp outlet online()
Pingback: 3ds emulator()
Pingback: natural garcinia cambogia()
Pingback: ipad pillow case()
Pingback: garcinia cambogia extract()
Pingback: how can you learn social media online()
Pingback: Payday Loans()
Pingback: lon rosen magic johnson()
Pingback: how to get your ex back()
Pingback: SEO Los Angeles()
Pingback: social bookmarking()
Pingback: designer ipad accessories()
Pingback: escorts las vegas()
Pingback: Gardena seo package prices()
Pingback: ham radio3k()
Pingback: seminovos BH()
Pingback: best hosting companies()
Pingback: internet marketing cincinnati()
Pingback: televisions for sale()
Pingback: affiliate program directory()
Pingback: best seo services()
Pingback: moncler clothes()
Pingback: lon rosen magic johnson agent()
Pingback: my site()
Pingback: acting schools chicago()
Pingback: Neverwinter Astral Diamonds()
Pingback: ä¿¡é•·ã®é‡Žæœ› RMT()
Pingback: locksmiths buffalo ny()
Pingback: Unlock iPhone Croatia()
Pingback: ä¿¡é•·ã®é‡Žæœ› è²«()
Pingback: przejscie do strony()
Pingback: yacht bedding()
Pingback: podcinka drzew zabytkowych krakow()
Pingback: youtube help forum()
Pingback: dobry triathlon()
Pingback: FUT14 Coins()
Pingback: austin personal injury lawyers()
Pingback: Highster Mobile spy()
Pingback: TESO Power Leveling()
Pingback: unlimited money in indian poker, unlimited money in teen patti()
Pingback: website traffic()
Pingback: rs power leveling()
Pingback: ESO Power Leveling()
Pingback: PSO2 ãƒ¡ã‚»ã‚¿()
Pingback: how to get in shape()
Pingback: World of Tanks Power Leveling()
Pingback: FF14 RMT()
Pingback: game of war fire age cheats()
Pingback: FIFA 14 RMT()
Pingback: fitflops philippines()
Pingback: wa academy of performing arts()
Pingback: cashpoint car title loans()
Pingback: breaking bad season 1()
Pingback: RuneScape Fire Cape()
Pingback: extreme trucks()
Pingback: FIFA 14 coins IOS()
Pingback: FFXIV Power Leveling()
Pingback: PSO2 RMT()
Pingback: poe power leveling()
Pingback: runescape power leveling()
Pingback: Neverwinter Power Leveling()
Pingback: rs 3 gold()
Pingback: runescape 3 gold()
Pingback: ãƒ©ã‚¹ãƒ†ã‚£ãƒãƒ¼ãƒ„ RMT()
Pingback: EverQuest Next Power Leveling()
Pingback: sell my car()
Pingback: EverQuest Next Platinum()
Pingback: songs pk()
Pingback: Cure for herpes()
Pingback: FIFA 14 coins()
Pingback: Guild Wars 2 Power Leveling()
Pingback: Diablo 3 Power Leveling()
Pingback: èˆžç¿”ä¼ RMT()
Pingback: monster xnxx()
Pingback: petsmart dog boarding()
Pingback: Unlock iPhone Vietnam()
Pingback: niacinamide review()
Pingback: funny Pictures()
Pingback: çœŸãƒ»ä¸‰åœ‹ç„¡åŒ RMT()
Pingback: Emma Watson Images()
Pingback: bird sitters naples fl()
Pingback: how to spy on a cell phones()
Pingback: FF11 è‚²æˆä»£è¡Œ()
Pingback: WOT è‚²æˆä»£è¡Œ()
Pingback: Neverwinter Astral Elmas()
Pingback: Diablo 3 RMT()
Pingback: ãƒ‰ãƒ©ã‚¯ã‚¨10 RMT()
Pingback: Baby Products()
Pingback: recette crepe()
Pingback: View generator()
Pingback: Кекс с какао()
Pingback: in home pet sitter in naples()
Pingback: temp street()
Pingback: criminal lawyers martinsburg wv()
Pingback: helpful site()
Pingback: Hypercet Blood Pressure Formula()
Pingback: how to make your own beats()
Pingback: boundra RMT()
Pingback: all flash games()
Pingback: Unlock iPhone()
Pingback: send free sms online()
Pingback: MHF Zeny()
Pingback: Health Book Ghostwriter()
Pingback: everquest next platinum()
Pingback: dog poop bags()
Pingback: cash for cars()
Pingback: Browse Around This Site()
Pingback: Wizardry RMT()
Pingback: æˆ¦å›½ixa RMT()
Pingback: ãƒ¬ã‚¸ã‚§ãƒ³ãƒ‰ ã‚ªãƒ– ã‚½ã‚¦ãƒ«ã‚º RMT()
Pingback: Diablo 3 è‚²æˆä»£è¡Œ()
Pingback: Diablo 3 Gold()
Pingback: ESO Gold()
Pingback: Ð¾Ð½Ð»Ð°Ð¹Ð½ ÐºÐ°Ð·Ð¸Ð½Ð¾()
Pingback: payday loans()
Pingback: How to Get Free Xbox Live 2 Day Trial Codes()
Pingback: Lovett's Lovin Pet & Home Care of Naples()
Pingback: path of exile items()
Pingback: ï»¿FF14 è‚²æˆä»£è¡Œ()
Pingback: ãƒ¬ãƒƒãƒ‰ã‚¹ãƒˆãƒ¼ãƒ³ RMT()
Pingback: FIFA 14 Coins PS4()
Pingback: Path Of Exile Items()
Pingback: gmail inicio sesion()
Pingback: Cheap FIFA 14 Coins()
Pingback: mind movies review()
Pingback: Ralf Schmitz()
Pingback: binary options software()
Pingback: hack facebook account()
Pingback: FFXIV è‚²æˆä»£è¡Œ()
Pingback: iherb discount code()
Pingback: iherb.com coupon()
Pingback: internet marketing advertising()
Pingback: iherb coupon()
Pingback: iherb coupon code()
Pingback: best granite countertops houston()
Pingback: FF11 ã‚®ãƒ«()
Pingback: source here()
Pingback: toledo wedding photographers()
Yup, small-caps are setting up for a comeback year. In fact, I believe they'll retake a leadership role in the markets in 2015. So now's your chance to set yourself up for potentially massive gains before these stocks start grabbing headlines again. Or... you can simply wait until some ex-purt on CNBC or Fox recommends them - and miss out on half the party. Your choice...
"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...
The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”
Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...
The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.
The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.
It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.