Category Archives: Economics & Finance

The Japanese Economy: Harikari in Slow Motion

Motivated by three recent articles by Zero Hedge and Mike Shedlock: In Shocking Finding, The Bank Of Japan Is Now A Top 10 Holder In 90% Of Japanese Stocks, Bank of Japan Owns Over Half of Japanese ETFs; Why Stop There?, and Bank of Japan Corners 33% of Bond Market: All Japanese Bonds, 40 Years and Below, Yield 0.3% or Less, we decided to take a closer look at the Bank of Japan (BoJ), particularly its balance sheet.

There is widespread agreement that this will end badly. No one, however, has any idea whether it blows up this month, this year or whenever. In this article, we explain the the nature of the problem and possible signs of the tipping point being reached. When it does blow, the shock waves will cascade through all economies.

NIRP: A Disease of the Twenty-first Century

Central banks (CB) of the world have begun experimenting with a range of monetary policies never tried before. Although they have a certain academic or theoretical underpinning, they are being implemented without any significant experience to assess their effectiveness.

The latest one to emerge from the labs of the CBs is Negative Interest Rate Policy or NIRP. We will first provide enough background that anyone can make sense of these policies. More importantly, in the case of NIRP, we will show how it will be an economic and social disaster for the person on the street. We will also reveal who stands to gain from the economic destruction that NIRP will create. First, however, we discuss positive interest rates.

Robotics In the Labour Market

We have been capturing references to robots and their impact on the labour market. We believe that the trend to displace human workers will continue across ever more industries. Targets are high paying  and simple routine jobs. The trend will continue as robotics costs decline and labour market costs – wages and benefits – increase. We are already seeing robots appearing in fast food restaurants offsetting increases in minimum wages.

People argue that low-paying jobs may be eliminated but high-paying highly skilled jobs will be created. While undoubtedly true, the numbers are asymmetrically biased against the low-paying jobs, the labour pool for which is growing due to our immigration policies and the decline of the educational system. The social impact is the area to be concerned about.*

People will buy a Big Mac served by a robot instead of a person if it is cheaper. And the people that argue we should simply boycott this trend are irrelevant. They lost the battle of Walmart against the downtown core of small-town America and they will lose this one.

Links are below:

Bitcoin or Two Bit Coin?

Bitcoin, the cryptographic “currency” is widely known and widely discussed. This ZeroHedge article The Complete Annotated Price History Of Bitcoin briefly discusses and presents a Goldman Sachs article explaining Bitcoin. We do not follow it and considering its ups and downs, view it as a good medium to destroy one’s real wealth with. For the interested, the link  is above.

Flash Point: The Best 2014 Forecast to Date

This is the time of year when everyone and their dog puts forth their forecast for the year. Often by year end we realize we should have listened to the dogs. For us on geopolitical themes it seems to be ‘tell me something new’. This is alright because it tells us that we seem to be on top of the major stuff and any black swans at this point are truly black.

On economic matters, it’s somewhat similar. The critical issues are pretty well known to everyone. The problem for all prognosticators is the timing. Statistically, someone will be closest to getting the timing right on any event to become the latest Wall Street darling, only to flame out on the timing of the next event. Jelly beans in a jar at a charity raffle.

There are very few people that we cannot hear enough from, however. One is Charles Biderman, CEO of Trim Tabs. He has an extremely pragmatic view of the American economy and which we think gives him the edge. He is looking at the right data from the right sources, from the right perspective, eschewing the mainstream government sources whose deficiencies he nails.

Here is his first video of the New Year. (Go here for the transcript: When Less Money Starts Chasing More Shares Stocks Will Drop.)

This video in a sense is not predictive, partly because there are no timing milestones and partly because he clearly knows better than to try and time a market correction. What he does do is to look at major areas of the economy that will affect the market this year and describe their current state. The reader is left to decide what the market implications will be and when their impact might be observed. The general picture he paints based on a well documented and argued position is not pretty and certainly contrary to the Fed’s position.

The only point that we disagree on is the presence or absence of liquidity from QE in the market. We believe that we have shown in Summa: The Great Myth that QE has injected no liquidity into the economy and markets. Tapering and indeed an actual reduction in the Fed’s balance sheet will have no effect on the liquidity in the economy. This leaves the impact of QE on markets as purely psychological – the Emperor’s wonderful robes. The Fed will try and skillfully reduce the market expectations of an illusory liquidity effect to the point that the market is functioning without this expectation that the Fed so skillfully created in the first place. We say ‘good luck’ to that.

As we have noted elsewhere, the Fed has only two classes of tools available to it. One is the use of interest rate policy to affect the economy, and these tools are pretty much broken. The other is communication or control of market and investor expectation and psychology. This may have become a Sisyphean task.

But do listen to Charles, he’s one sharp pencil.

Of Elephants and Black Swans

Consider the parable of the three blind men and an elephant. As Wikipedia explains it (emphasis added):

The story of the blind men and an elephant originated in the Indian subcontinent from where it has widely diffused. It has been used to illustrate a range of truths and fallacies; broadly, the parable implies that one’s subjective experience can be true, but that such experience is inherently limited by its failure to account for other truths or a totality of truth.

 Also consider the notion of a black swan (BS) event introduced by Nicholas Taleb. As Wikipedia describes it:

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. … “black swan theory” refers only to unexpected events of large magnitude and consequence and their dominant role in history.

Summarizing these two notions:

  1. Our knowledge of anything in the world is necessarily and always partial;
  2. this knowledge as far as it goes may or may not be true;
  3. there can be events that come to pass that while being known, are considered to be so improbable they are not taken into consideration in any planning or action;
  4. these improbable events may have huge consequences; and
  5. not all BS events are known. (consider that black swans existed but were unknown before their discovery in Australia by early explorers.)

We read daily, material from a number of respected sources and by very smart people. In particular, on Zero Hedge this morning, we read the essay by Michael Snyder of The Economic Collapse blog, titled Dent, Faber, Celente, Maloney, Rogers – What Do They Say Is Coming In 2014? In it he provides quotes from 14 respected economic experts about what they believe is coming in 2014 and just beyond. This got us thinking. The thoughts of 14 of the most astute blind men, taken together, should give us a better understanding of the elephant we live with and perhaps a glimpse of the next black swan.

When the Bubbles Come Home to Roost

In arguing that it was impossible for China to “dump” their Treasuries (Who’s Dumping Treasuries?) we made these points:

  1. The total nominal value of their Treasury holdings (The table MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES) were – and remain – greater than the currency in circulation (Table 8 of the H.4.1 statistical release). In other words, there is not enough money to pay them for their Treasuries.
  2. The reason they hold Treasuries is that they held the equivalent amount of USDs that paid them nothing. Selling Treasuries simply gives them back the USDs they didn’t want.

Well it turns out that they now have a need for USDs so in June, the last month for which we have data, they sold some 20 billion of treasuries. We may now expect more sales because global liquidity issues – remember that the USD is the global reserve currency – are rising as foreign currencies are in chaos and many countries are experiencing runs on their pools of foreign reserves, read: Emerging market rout is too big for the Fed to ignore.

A Brief Note on Gold As a Currency

With the refinements our ideas on money in Understanding Money: Part 5 – It’s All Money, we decided to apply them to a topic we have addressed in the past, that of the return to a gold standard.

There is an audience for the idea that the change from a gold standard to a pure fiat paper currency is a root cause for the current financial crisis. In particular, a paper currency allows for the expansion of the monetary base in an undisciplined fashion. We suggest that a pure fiat currency and a gold-backed currency both represent MZMc or the currency component of money with zero maturity whose composition or nature is irrelevant to the money creation process. To understand our thinking, refer to the series of articles on “Understanding Money” at the end of this essay.

The Banks Are Not Lending ….

We began a note on this a year ago (Are Banks Afraid to Lend? unfinished), mainly to document our thoughts and correspondence on the issue. At least as far back as 2009 we were considering the possibility that lending was not occurring, a common critique of the system at the time, because there was lack of demand or lack of willing credit-worthy borrowers. This was certainly not a common viewpoint. Unfortunately, the ignorance that produces this viewpoint remains. We summarize the issue below.

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