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Submitted by Alasdair Macleod via The Cobden Centre blog,
Governments and central banks have made little or no progress in recovering from the Lehman crisis six years ago. The problem is not helped by dependence on statistics which are downright misleading. This is particularly true of real GDP, comprised of nominal GDP deflated by an estimate of price inflation. First, we must discuss the inflation adjustment.
The idea that there is such a thing as a valid measure of price inflation is only true in an econometrician’s imagination. An index which might be theoretically valid at a single point in time is only subsequently valid in the wholly artificial construction of an unchanging, or “evenly rotating economy”: in other words an economy where everyone who is employed remains in the same employment producing at the same rate, retains the same proportion of cash liquidity, and buys exactly the same things in the same quantities. Furthermore business inventory quantities must also be static. All human choice must be excluded for this condition. Only then can any differences in prices be identified as due to changes in the quantity of money and credit. Besides this fiction, an accurate index cannot then be constructed, because not every economic transaction is reported. Furthermore biases are built into the index, for example to overweight consumer spending relative to capital investment, and to incorporate government activity which is provided to users free of cost or subsidised. Buying art, stockmarket investments or a house are as much economic transactions as buying a loaf of bread, but these activities and many like them are specifically excluded. Worse still, adjustments are often made to conceal price increases in index constituents under one pretext or another.
Economic activities are also only selectively included in GDP, which is supposed to be the total of a country’s transactions over a period of time expressed as a money total. A perfect GDP number would include all economic transactions, and in this case would capture the changes in consumer preferences excluded from a static price index. But there is no way of identifying them to tell the difference between changes due to economic progress and changes due to monetary inflation.
To illustrate this point further, let’s assume that in a nation’s economy there is no change in the quantity of money earned, held in cash, borrowed or repaid between two dates. This being the case, what will be the change in GDP? The answer is obviously zero. People can make and buy different products and offer and pay for different services at different prices, but if the total amount of money spent is unchanged there can be no change in GDP. Instead of measuring economic growth, a meaningless term, it only measures the quantity of money spent. To summarise so far, governments are using a price index, for which there is no sound theoretical basis, to deflate a money quantity mistakenly believed to represent economic progress. In our haste to dispense with the reality of markets we have substituted half-baked ideas utilising dodgy numbers. The error goes wholly unrecognised by the majority of economists, market commentators and of course the political classes.
It also explains some of the disconnection between monetary and price inflation. Price inflation in this context refers to the increase in prices due to demand enabled by extra money and credit. As already stated, newly issued money today is spent on assets and financial speculation, excluded from both GDP and its deflator.
It stands to reason that actions based on wrong assumptions will not achieve the intended result. The assumption is that money-printing and credit expansion are not having an inflationary effect, because the statistics say so. But as we have seen, the statistics are selective, focusing on current consumption. Objective enquiry about wider consequences is deterred, and nowhere is this truer than when seeking an understanding of the wider effects of monetary inflation. This leads us to the second error: we ignore the fact that monetary inflation is a transfer of wealth from the public to the creators of new money and credit.
The transfer of wealth through monetary inflation is initially selective, before being distributed more generally. The issuers of new currency and credit are governments and the banks, both of which reap the maximum benefit of utilising them before any prices rise. But the ultimate losers are the majority of the population: by the time new money ends up in wider circulation prices have already risen to reflect its existence.
Everywhere, monetary inflation transfers real wealth from ordinary people on fixed salaries or with savings. In the US for example, since the Lehman crisis money on deposit has increased from $5.4 trillion to $12.9 trillion. This gives us an idea of how much the original deposits are being devalued through monetary inflation, a continuing effect gradually revealed through those original deposits’ diminishing purchasing-power. The scale of wealth transfer from the public to both the government and the commercial banks, which is in addition to visible taxes, is strangling economic activity.
The supposed stimulation of an economy by monetary means relies on sloppy analysis and the ignorance of the losers. Unfortunately, it is process once embarked on that is difficult to stop without exposing the true weakness of government finances and the fragility of the banking system. Governments with the burden of public welfare costs are in a debt trap from which they lack the resolve to escape. The transformation of an economy from no monetary discipline into one based on sound-money principals is widely thought by central bankers to risk creating a major banking crisis. The crisis will indeed come, but it will probably have its origins in the inability of individuals, robbed of the purchasing power of their fixed salaries and savings, to pay the prices demanded from them by businesses. This is called a slump, an old-fashioned term for the simultaneous contraction of production and demand. Not even zero or negative interest rates will save the banks from this increasingly certain event, for a very simple reason: by continuing the transfer of wealth from individuals through monetary inflation, the cure will finally kill the patient.
There is a growing certainty in the global economic outlook that is deeply alarming. The welfare-driven nations continue to impoverish their people by debauching their currencies. As Japan’s desperate monetary expansion now shows, far from improving her economic outlook, she is moving into a deepening slump, for which this article provides the explanation. Unfortunately we are all on the path to the same destructive process.
If my fellow Americans understood the history of Israel and Palestine, their views would change overnight … and they would demand that Israel no longer be given unconditional support and blank checks to do whatever they want …
Apartheid and Occupation
Terrorism
Public Opinion
War Crimes
More
Yes, yes, we know: soon everyone will be driving a Tesla, and, perhaps, sooner Tesla will build its much-hyped, and so critical for its business model Gigafactory (about which it had this to say: "In June, we broke ground just outside Reno, Nevada on a site that could potentially be the location for the Gigafactory. Consistent with our strategy to identify and break ground on multiple sites, we continue to evaluate other locations in Arizona, California, New Mexico and Texas."). In the meantime, and just as the biggest wealth effect-creating (for the 0.1%) stock market of all time appears to be ending, here is Tesla's quarter, and last few years, in three gigacharts.
Revenue: GAAP vs non-GAAP.
EPS: GAAP vs non-GAAP.
And most importantly, Free Cash Flow. There is only one type of these. And at this cash burn rate, Morgan Stanley will have to upgrade TSLA soon for another convertible offering.
John Taylor of FX Concepts is angry.
Stability Breeds Instability
In three words our title describes one of the basic foundation blocks of Hyman Minsky's theories.
The idea is so straightforward, so logical that you can feel the process in your bones, yet no central bank, no finance minister, no head of state has ever publically recognized it. We analysts seem to know it is there as we all talk about gearing up to make a return in these low interest rate, low volatility times. We know our investments, the equities we buy, the bonds we choose are the ones that are levered even if we aren't. Some incredible percentage of US corporate bonds are covenant lite, more than twice as many, percentage wise than at any peak before a crash, but we still buy. How else can anyone make a return that will get clients, make enough to cover the retirement benefits our pension is committed to, or (at the bottom of it all) keep our jobs? We know we are walking further out a tapering diving board but we have to do it. Why don't we face facts and study the principles behind the recurrent crashes? Of course, one individual cannot buck the trend because he/she will lose their job, before the inevitable top.
One of my great-grandfathers was a family hero because he, as the manager of a mutual fund company was being sued for under-investing as the crash arrived in 1929. He was acquitted. Maybe this underlies my belief in Minsky's understanding of financial development and my crusading for the yin and yang of cycles. I even liked reading Hegel, Pareto, and Shumpeter in school. What is the matter with us? Why can't we - especially our financial leaders - get it? Too much demos? Are we ruled by the Sun, the NY Post, and the Roman circus?
Dropping back to earth from 10,000 meters - unfortunately, not high enough to be safe - the Japanese yen and the Dollar Index in general went wild this past week rising from comatose - straight lining almost - seemingly out of nowhere. It wasn't actually the Japanese industrial production coming in at minus 3.3% instead of the forecasted minus 1.2% that was such a surprise. We and many other analysts have been saying the Japanese economy was acting worse than it did in 1997 when they last hiked the sales tax, but the authorities everywhere said nothing, there seem to be no vigilantes of any sort. This is not the 1970's or the 1980's, we don't call an idiotic policy by its name (with money, that is). Zero Hedge can rant on but no one follows them or, more important, does a real analysis of the situation.
So now, Japan is collapsing. So what? In the summer of 1997, at exactly the same time-span after the hike as today, the yen started a 30% decline over the next year. That's not our forecast, but it is now two standard deviations from it. Any takers? Even if there are there are enough benchmark hungers to make the collapse a minor probability. What about Europe? Politics don't matter. I remember the German grand coalition, all of society agreed on the right course - except a few and there was hell to pay. That stability led to political instability. We would not buy French, Italian, Spanish and other 5- and 10-year paper at under US rates. What are they thinking? We know and so did Minsky. It will not end well.
h/t Ryan
As the greenback has retreated again after faltering below yesterday's high of 0.9107, retaining our view that minor consolidation would be seen and pullback to 0.9060 cannot be ruled out, however, reckon downside would be limited to support at 0.9035 and bring another rally later, above said resistance at 0.9107
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As the British pound dropped again after meeting renewed selling interest at 1.6928 earlier today, adding credence to our bearish view that recent decline from 1.7192 top is still in progress for retracement of early upmove and further weakness to 1.6840-50 would be seen, however, near term oversold condition should
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The single currency has remained confined in narrow range after falling to 1.3367 yesterday and further consolidation is in store, however, as long as said support holds, prospect of another rebound remains, above the Ichimoku cloud top (now at 1.3408) would suggest low is possibly formed, bring test of resistance
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As dollar has retreated after faltering below yesterday's high of 103.09, retaining our view that minor consolidation would be seen and pullback to 102.55-60 cannot be ruled out, however, reckon 102.30-35 would limit downside and bring another rise later, above said resistance at 103.09 would extend recent rise to 103.30
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Euro's near term sideways trading is expected to continue and near term downside risk remains for a test of last week's low at 0.7874, break there would extend recent decline towards 0.7850-55, however, as this move is still viewed as the final leg of recent impulsive wave, downside should be
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As the greenback has retreated after intra-day brief rise to 1.0930, suggesting minor consolidation would be seen and pullback to 1.0850 cannot be ruled out, however, reckon 1.0820-25 would limit downside and bring another rise later, break of said resistance would extend the rise from 1.0621 low for at least
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As reported earlier, following some horrifying guidance German sportswear titan Adidas tumbled by the most ever, blaming not the weather, or the World Cup, but Russia (leading some to wonder just who will be shouldering all those "costs" Obama refers to during every teleprompted appearance).
What we didn't mention is that today's record massacre of Adidas longs happened minutes before Goldman decided, after the fact to remove the company from its "Conviction Buy" list (but still kept the stock that has lost 18% in the past year at a Buy).
To wit: "We remove adidas from the Conviction List following the company reducing FY14 net income guidance (to €650mn from €830mn), resulting in 33%/40%/46% cuts to our FY14-16 earnings estimates. Our new 12-month price target is €77.5. Since being added to the Conviction List on October 18, 2013, the shares are -16.1% vs. FTSE World Europe index +6.7%. We also remove the stock from the Directors of Research Focus List."
What can one possibly add here to the following well-known image which says it all.
