Economic and Financial Outlook (Part I)

“The coming European monetary crack-up is rooted in the fact that the ECB’s financial repression and ZIRP policies have—like everywhere else—-destroyed honest price discovery in Europe’s massive sovereign debt market. There is no other way to explain the preposterously low 10-year bond yields prevailing this morning for the various and sundry fiscal cripples that comprise the EU-19.” David Stockman’s Contracorner

The bold script is Mr. Stockman’s emphasis, although it serves to elucidate our message also.

What he’s saying is that these prices and yields are not real.

In his column, Stockman assesses France in the same light that we have put the US government over its respective levels of debt/gdp. France, he writes, is “on a fast track toward the 100% debt-to-GDP mark where the debt trap of big deficits and faltering growth becomes nearly irreversible.” People should know by now, as our readers do, that the US government has blown through that level. We’ve been hammering away not only at this statistical fact, but in particular, its meaning: as a “trap” that has become “irreversible.”

These words are no longer mere hyperbole!

The Swiss policy abandoned last week was a crucial source of irrational liquidity for western markets, and hence, the veil of distraction that has kept people from focusing on problems that have not gone away.

It was a cog in a global alliance that has been punishing savers all over the world, forcing them into riskier assets, or discouraging them from saving altogether; all the while underwriting leveraged speculation and general malinvestment that has destroyed price discovery in sovereign debt markets on most continents.

For the Swiss, enough was enough. The SNB’s dissent caught markets by surprise. Undoubtedly, it is a sign there are limits to traversing economic law in a world where it seemed, at least for the past few years, that central banks could do no wrong. Now, we hear, the Chinese banking sector will be opening a bank in Switzerland to facilitate the clearing of the growing RMB market in the continued drive to de-dollarization.

Concurrently, the world that has relied on hot money flows from Switzerland (and Japan) to drive bond yields down, everywhere, to practically nothing over the past two years –despite the deteriorating financial positions of the issuing sovereigns– has reached a wall that will be hard to knock down even with more QE.

The sun is setting on the whole damn thing, with dollars, euros, and pounds most at risk in the years ahead - next to emerging market currencies like the Turkish Lira, Indian Rupee, Israeli Shekel, or Hungarian forint.

Now, with the collapse in oil and other prices, and the prospect of asset deflation back on the table, the world’s central planners, deluded by their own bad economic theories, and maddened by the deflation fear, have gone on a rampage in Europe, effectively plagiarizing the Fed’s inflationary policies.

The fate of Europe has been sealed with this policy.

The Euro’s days are numbered, even though the immediate reaction might favor the euro due to the short term effects of the policy on euro denominated asset prices (esp equities since bonds are likely maxed out).

Don’t be surprised to see Germany’s commitment waiver when the fallout starts to appear, or for the BOJ to cancel its QE support prematurely. The western banking cabal has its neck stuck out quite far today!

Recapping Important Themes of 2014

Before we get to our outlook for the year i want to spend a bit of time recapping some of last year’s themes, which also form the basis of our outlook, and are critical to understanding the current economic situation.

First, there is no real recovery. Through banking policy western governments have fabricated an illusion and unhealthy distraction from their fundamentally insolvent states in the form of another unsustainable investment boom. It is unsustainable because it is financed by money creation rather than real savings, which produces a business cycle, phony profits, and is harmful to the capital base -the source of growth.

Another theme I have been expounding is that there is no way to exit the current monetary policy without forcing governments into default because it has all gone too far now. Many of these governments are going to be forced to decide between inflating their debts away (like Russia did) or genuine public sector austerity.

Unfortunately the path of least resistance continues to lead down the road to weimar.

I have also tried to shed light on the most popular delusion of the day - i.e., the evidently false notion that the Japanese printing press is in overdrive and that other central banks are inflating more than the Fed.

The year 2014 was marked by a slowdown in money growth in all the largest economies, even the U.S., although the US still grew money faster than the rest (excluding emerging markets currencies). The former is why we are seeing signs of an impending bust on the horizon, i.e., such as the energy sector’s woes.

Another factor that marked the year was the massive Swiss and Japanese carry trades that pushed EU yields past nothing, causing US-EU yield spreads to widen in favor of UST’s and ultimately the USD.

Most pundits fail to understand this dynamic for what it truly was: the front running of a trade whose outcome they could influence. Buy up the bonds and then pressure the ECB into buying them back.

How Do You Cover Up an Insolvency?

-i.e., definition: Insolvent: “unable to pay debts owed.” (My Apple dictionary)

For the moment, most western governments, including both France and America, can still service their growing indebtedness. However, that’s only because they are seven years into the most aggressive interest rate suppression ever pursued by any single one of them, let alone an entire western coalition.

In other words, one way to cover up insolvency is by destroying “honest price discovery”, everywhere!

How Irreversible is Irreversible??

Central bankers and governments have been pursuing this policy for so long they have no idea where the boundaries of reality lie. The policy (interest rate suppression) axiomatically incentivizes the accumulation of too much debt, and is made worse by the belief that government can determine interest rates, or that we ‘owe it to ourselves’...all of it inherent in a monetary system where the wolf is in charge of the chicken coup.

[The public no longer controls the reserves of the banking system, or determines which succeed and which fail. It has also given up control of much investment. These and other things are planned top down today.]

But it has become a plague, a Hamiltonian cancer. And it’s malignant!

It has indeed reached a point where it is choking off growth…everywhere. And not just in France.

To be sure, Stockman’s 100% threshold is likely arbitrary, or at best, based on historical precedent.

The precise point at which the debt and inflation trap become “irreversible” is entirely arguable.

Besides, in truth, no bad balance sheet is truly ever irreversible. There are usually steps that can be taken to reverse or repair insolvency. It may be fixed by the addition of new capital, urgent rationalization, etc.

Even in the case of “the various and sundry fiscal cripples that comprise the EU-19” it is reversible if they opted for enough self-rationalization (privatization and substantial reductions in expenditures). However, given present attitudes toward austerity both there and here such a policy seems unlikely any time soon.

The trend of faltering growth and increasing debt and inflation (and totalitarianism) becomes irreversible, for all intents, when (1) abandoning the interest rate suppression might mean bankruptcy for the state, and (2) cutting expenditures or liquidating the bureaucracy would throw society into chaos and violent revolution.

This is the essence of the debt and inflation trap…its irreversibility if you will.

Indeed, that is the situation Greece, France, the US, UK, Japan and many others face.

Although governments have had the power to print and borrow for a long time, circumstances have never before reached a stage in the U.S. where the option of stopping (as Volcker did in the late 1970’s) was no longer broadly feasible. This marks a dangerous new reliance on the borrow, inflate and spend paradigm.

Has the Fed Not Already Cast its Vote 4 Default?

With an obvious reluctance to end the cheap monetary policy several years into a GDP expansion, long after reaching its original unemployment rate targets, and despite the potentially bullish stimulus of an oil price cut, hasn’t the Fed decided this question? How frequently has it blinked about exiting since first threatening to do it in 2009? I count at least three; at least as many as there have been QE’s. I continue to believe this reluctance, like a bad bluff, betrays a bad poker hand. That is, they know they can’t tighten.

We continue to dare them to in 2015!

But Is The US Government Really Insolvent?

Today, falling prices and higher (or normalized) interest rates, which is what you would expect if the central bank or its cheap money policy were abandoned altogether, would quickly eat up federal tax revenues.

Given that interest on the public debt in 2014 totalled $431 billion at a record low ~2.5% yield, if the US government were forced to refinance its debt closer to just its long term average yield of 7-8% it could drive those finance costs up to as much as $1.5 trillion annually –a trillion dollar swing for every 550 basis points!

The deficit under most plausible scenarios would easily widen back to over a trillion as the interest burden was catapulted from just 15% of tax receipts (at the artificially low interest rate) to 50%, or even more if we assume either a shrinkage in tax receipts due to falling GDP and crony corporate earnings on higher rates, or some type of inflationary or fear driven rise in interest rates back up to the extremes of the early eighties.

With each percentage point potentially adding $181 billion in annual finance costs (though understandably it takes a few years to roll over all the debt at the new yields) it is easy to see the limits. Interest charges could conceivably reach 100% of tax receipts somewhere between a 10 and 15 percent bond yield.

In Volcker’s day, the situation was a bit more tenable because the public debt was barely a trillion dollars, and it was less than 25% of GDP. The government then had not yet grown the debt to a tipping point.

It proved as much with the Volcker exit.

However tough those days were, they would be several times tougher today.

But could uncle sam pay his bills if the Fed wasn’t suppressing the rate of interest? What would you make of a private company in this position –where 50-100 percent of its REVENUES went to interest payments alone? Consider your average gold miner where bare bone production costs make up 60-70 percent of gross revenues in normal economic climates. Er, well, put him in charge of the interest rate, and no one’s the wiser! Still, that is all even before considering the impact of the unfunded healthcare related liabilities.

Indeed, we believe the Fed’s reluctance to allow a normal rate suggests that they think governments today can no longer afford one. This is bad news for the factors that truly drive growth, as they will continue to be wasted in the service of the general illusion. It is also bad news for those of us holding out for deflation!

Can a Central Bank Suppress Interest Rates Indefinitely?

While many economists and gold bugs have been dead wrong about interest rates for a lot longer than a decade, central banks, and the Fed included, have lost many battles on this front in the past as well.

Certainly, during the final years of the previous (Bretton Woods) monetary standard, in the sixties, as it gradually choked on its own insufficiencies, the Fed and its crony cohorts probably did not design it so that interest rates would rise up to 10% by the time Nixon pulled the plug…or the high teens thereafter.

The fact that Volcker had to abandon the policy is the exception that proves the rule (or at least our point), for, if economic law did not overcome the Fed’s will in those years why did it finally abandon its policy?

What was it reacting to? The question is rhetorical. The historical record has been diligent on that one.

I’m just making the point that if economic law never got in the way then why would the Fed ever tighten, and why would it not print trillions and trillions of dollars every day to enrich the economy?

Why stop at a trillion per annum?? Argh!, the old misers!

So Where’s the Inflation??

As a matter of fact, the occasional discontinuance of the easy policy (a.k.a. “the tightening”) is a significantly unappreciated reason why it has not yet produced a lot of price inflation. Volcker himself prematurely rescued the new monetary system by putting the brakes on money creation for three years (1978-80). But even considering the last tightening by the Greenspan-Bernanke Fed (2004-07), which ultimately precipitated the 2008 financial crisis; it too halted a trend in price inflation that had caused revolts in some emerging nations in 2007 over the soaring cost of agricultural goods. It was one of the reasons the Fed kept tightening in 2007. The short episode even has a wikipedia page for it,

http://en.wikipedia.org/wiki/2007–08_world_food_price_crisis

It has a whole page of explanations and potential causes, none that include the central bank, but low and behold, the crisis went away when the central banks stopped printing! At any rate, I’ve covered the inflation question in more depth in previous issues than I will today. There are other factors involved, including overblown estimates of money creation early in the cycle by our side, and factors involving the demand for money – a concept that almost no one who hasn’t read Rothbard or Mises seems to even get.

[Although most people prefer the velocity of money idea please be sure to read my debunking here.]

Yet the absence of price inflation at the moment is hardly relevant.

For, part of our argument for the collapse of the dollar centric monetary system is that the easy money policy can no longer really be discontinued because the government cannot afford normalized rates.

If we’re right, there is more than a strong possibility the Yellen Fed falls behind the curve on dealing with the dreaded price inflation when it finally arrives, as that becomes inevitable at some point if it is really true that the central bank can no longer discontinue the easy money policy without bankrupting the government.

In this sense, if it is no longer in a position to pre-empt price inflation, hasn’t the Fed already lost control?

But you don’t have to buy my inflation conviction to make the case for higher interest rates.

What About Default Risk!

Consider the other side of the coin: deflation -which most of its proponents don’t even understand.

If one is naïve enough to buy into the very hobgoblin promoted by central bankers as pretext for the easy policy, then at least they should be honest with the results. Wouldn’t tax revenues shrink under deflation?

The tax system is built to exploit rising prices, not falling prices (another reason the masters of the universe would not want deflation). And we’re not talking about the mild deflation caused by productivity increases.

Isn’t that what happened in Europe in 2010-11 before the Swiss and Japanese carry trades reversed it?

Greek yields didn’t soar on an inflation threat, but rather, due to deflation, and specifically default risk.

That is, contrary to the chatter you hear on bubble tv about how falling interest rates is a call to impending deflation (thus the Fed must act!), if deflation were to truly occur in the US, “like everywhere else,” yields would soar. In Europe falling yields reflect widespread expectations of a coming thunderstorm of QE (intervention) -not deflation. That is not to say that deflation expectations can’t cause interest rates to fall in a truly free market in which there was no central overseer attempting to determine what this rate should be.

But, in such a market, the threat of the kind of debt-deflation spiral central bankers work tirelessly to avoid today would probably not exist. After all, what originally created that deflation risk was fractional reserve banking - a concept that isn’t broadly feasible in a free and unregulated market - and which is ultimately propped up by deposit guarantees, legal tender laws, taxpayer funded bailouts, and monopoly legislation.

Let me emphasize that in a situation where there did not exist a large concentrated single debtor whose credit rating affected the entire spectrum of interest rates (i.e., absent the over-indebted benchmark), and under a sounder monetary system, the falling rate of interest might well foretell consumer price deflation.

But today that would just be a head fake. A deflationary bust would very likely impact the government’s solvency - due to the effects of shrinking incomes on tax receipts - and inflate risk premiums on its debt.

What Else Could Make Rates Go Up?

Interest rates are determined by the supply of savings made available to the loan market and the demand for their redeployment/investment (or borrowing demand). The savings are either voluntarily supplied by individuals (driven by time preference) or forced by the Fed (i.e., printed up), but typically a mixture of both.

If the increase in savings is voluntary (real) the build out of the production structure is sustainable because the whole purpose of the interest rate is to coordinate the factors of production along inter-temporal stages of the structure of production...i.e., to signal to entrepreneurs when to invest more in the earlier stages.

Increases in such savings all else equal (i.e., every real abstention from consumption) signal entrepreneurs - through a reduction in the interest rate - that it pays to reallocate scarce factors (land, capital, labor) away from the late stages of the production structure - those closer to retail - to earlier stages (mineral extraction, R&D, large real estate projects, etc.).

On the other hand, if the increase in savings is forced (supplanted or displaced) by an increase in credit out of thin air (manufactured by the fractional reserve banking system) the investment boom is unsustainable.

At the depressed interest rate there is not going to be enough real saving to support the greater investment (borrowing) demand (at that lower rate). Of course, the fractional reserve banking system creates and fills this gap at the same time through the issuance of duplicate receipts to the existing pool of savings. But the flood of phony money, which forces interest rates lower and stimulates borrowing demand just the same, only fools entrepreneurs into thinking there are more resources available for redeployment to the earlier stages of production (to the production of higher order capital goods) while at the same time discouraging their actual redeployment from their employment in the production of lower order (consumption) goods.

Since money creation caused interest rates to fall - instead of someone or group abstaining from present consumption - the factors devoted to serving consumers have not yet availed themselves for redeployment to the earlier stages of production. But the lower interest rate stimulates investment in the early stages nonetheless and the excess money effectively fuels a tug of war over the scarce factors until their prices rise. If their prices rise too much, or too fast, or if the Fed withdraws the policy, plans will be scrapped.

Whatever way you look at it, the problem ultimately comes down to too much investment in the early stages of production given the amount of present consumption that individual members of society wish to sacrifice.

The policy subsidizes investment AND consumption as if no trade off had to be coordinated. Indeed time and again the economic planners assume a world without scarcity, time, capital, and even without humans.

As with price controls, government attempts to control interest rates produces shortages, only in savings instead of dwellings. Much of this type of waste remains unseen as things that could have been instead of what was. But the bottom line here is that when central planners suppress the rate of interest they are creating an imbalance between saving and investment, and interfering with the market’s coordination of resources along the different stages of production, which leads to a boom-bust sequence where every time the banking system were to stop manufacturing credit the relevant rate of interest would have to rise to stimulate more real saving while simultaneously reducing borrowing demand until markets cleared.

By virtue of the fact that the policy produces a shortage of savings, its withdrawal must force rates back up.

WHEN WHEN WHEN?!?

I think we are seeing that happen at the margin, and it started with Russian, Chinese and Greek yields months ago, which so far has worked to the advantage of the relatively investment grade issues...UST’s, Gilts, Bunds, etc. The Swiss decision on the euro floor last week only accentuated the bifurcation at first.

The decision was undoubtedly rooted in the central bank’s fear over the effects of the controversial policy announced by the ECB. While central bankers have portrayed the interest rate suppression as a fix to the perpetually coming deflation (damn that capitalism) it has been evident that the sovereigns are running into trouble again. Rumour had it the Greek treasury faced an 80% shortfall in receipts just ahead of an uncertain bipolar election result, and that some of the banks in Greece were experiencing money draws.

I still believe that Treasury yields bottomed in 2012, and point to the fact that the Fed’s QE3 couldn’t push them down in 2013. They went up in the face of the Fed’s purchases due to the outsized gains in stocks underwritten by the policy all year. While Wall Street partied, capital and investment outflows from Japan and Switzerland concentrated in Europe, in anticipation of QE, conspiring to push sovereign bond yields to unworthy lows. The spreads shifted from favoring Euro bonds to favoring Treasuries during 2014.

In other words, both the USD’s strength and the fall in treasury yields last year, especially in the last half, was forced by the climax of a Japanese-Swiss carry trade based on front running the ECB intervention!

Talk about how to make money, heh…i.e., by front running an outcome that you can influence!

How much money have the Warburgs and the Goldmans made by puppeteering the central bankers.

But this trade appears to have reached a turning point now.

We believe the unwind has begun, and will accelerate after the initial volatility resulting from the celebratory rally in stocks and commodities on the ECB announcement this week.

My guess is that the rise in yields will begin in earnest after the initial panic stages of the coming bust in conjunction with the central bank reactions to it. But this could take us into 2016.

Let me repeat that I think the bottom in yields, at least on the 10yr treasury, already occurred in 2012, but I would place the odds of the beginning of a sustained rise (in treasury yields) at 50/50 in 2015.

Will the Fed Raise Rates in 2015?

It will have to if it wants to maintain credibility.

But it really does not matter because it cannot and will not lead the complex higher.

It might pretend to be prodding yields higher while following the market up with formal FOMC decrees, but it would in some sense lag the market. That is, it will not simply withdraw the impetus to the lower bond yields (the printing press). Not this year. It will manage the money growth rate and try to keep rates from rising too quickly, or too close to the natural or market rate…or anywhere near where it might upset the stock markets. I believe this threshold today is about 4%, maybe 5% on the 10yr Treasury.

However, since we are now betting on an implosion of the boom and an equity collapse, I would not bet on any lasting interest rate increases by the Fed. The likelihood is that we get another QE in 2015 instead.

The Next Economic Crisis Will Take Down Governments

“Inflationism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism and peace, so is inflationism part and parcel of imperialism, militarism, protectionism, statism and socialism.” Mises

I mostly agree with those who believe the biggest bubble of all today is the global government bond bubble, except I would conjoin that together with the entire progressive ideology as well as the dollar system.

Given the Fed, the dollar is a huge bubble too.

I think dusk has now befallen the 43-year-old monetary experiment – certainly these sorts of debt levels did not exist in the seventies when the Volcker Fed saved the dollar from a premature collapse (1978-81).

Nevertheless, the crashing of the bond bubble may be intertwined with the whole edifice that supports it, as well as everything that the bond bubble supports in turn –like stock, and other financial markets.

This all may seem surreal if you’ve bought into the distraction produced by all the monetary chicanery.

If you think earnings are increasing, double-check your calculations. US after tax corporate profits add up to roughly $8 trillion over the past six years, BUT the US money supply expanded by $5 trillion in that period, and I was shocked to learn that almost 95% of last year’s profits went to stock buybacks!

That’s a whole other story that we have to short this year.

At any rate, I truly believe the next bust, which may have already appeared in the oil, copper and transportation sectors, is going to take governments down and blow RESERVE currencies up.

I can’t know how exactly it will play out but let me warn you now: the US government cannot be excluded from this list given its own debt and inflation dynamic. I don’t buy the idea it is going to be seen as a safehaven or a “fortress” of anything at this point primarily because the US dollar and capital markets have also been beneficiaries of the destruction of honest price discovery in Europe as well as from another delusion. In fact, if there is one thing that will mark 2015, and that must undermine the current US led “boom” in financial values at the same time, it is that Europe (and Japan) have not printed nearly as much as the rest of the world thinks, and not nearly as much as the Fed, even in the latest year! This delusion is going to crush yen bears and dollar bulls in one fell swoop, and we warn you now to listen carefully.

Nobody owns the yen!

The Yen makes up the smallest allocation in everyone’s portfolio. Central banks own just 4% as currency reserves. And same with JGB’s: as of a 2011 IMF report foreign ownership of Japanese government bonds amounted to just 5%. On the other end of the spectrum is the US dollar, which makes up 61% of central bank reserves (down from > 70% at the outset of the euro experiment 1999-2001), and where foreign ownership of Treasury securities approaches the 40% level. Unlike the US dollar, which is over-owned, over-printed, and probably lies in bundles under every hooker’s mattress, Yen is scarce, like Cesium.

To boot, the Japanese money supply grew only 4% last year, despite all the rhetoric, compared to over 5% for Europe, and 7% in the US. It has grown just 22% in the past 5 years, cumulatively, compared to 33% for the Euro and over 70% for the USd! Over the past ten years the BOJ has inflated money by just 32%!

That compares to 102% for the Euro area and well over 100% in the US –the US has expanded money by 100% just since 2008- in roughly the same time period. In almost every sense, the Fed has waged the most consistently aggressive monetary policy in the developed world, especially in the post 2008 period, where it has increasingly mirrored policies of countries like South Africa, Mexico, India, Indonesia, and Poland. Even China has been pursuing a sounder money policy than the Fed since 2008. These statistical differences also explain why US equities performed better than most of the rest of the world in 2014.

How Dollar/Yen Is at the Center of the Most Popular Delusion of 2014

I first highlighted this delusion in order to point out how the US treasury market and the USD benefitted from it in 2014 –note the chart of the German bund yield in red compared with the UST yield in black.

In my analysis, Japanese investment, crowded out by the BOJ’s asset (JGB) purchases – and mistaken by currency traders for money inflation – turned outward in search of yield. Insurance companies and the government’s pension fund channelled investment into European sovereign government bonds IN ANTICIPATION of an ECB policy of buying them, which spilled over into US assets as the Treasury note spread over Euro yields widened.

In the Swiss case, the central bank was buying EU assets directly.

Strength in both the US dollar and US Treasury bond market continues to reflect the fact that yields on euro government debt have disappeared. This trade then is/was the source of the dollar’s rally against the Euro.

If you listen to MSM about this, you will come away with the idea the dollar has been going up because the Fed has tapered (as the US economy gains traction) while the Euro and Yen have been falling because their economies are relatively weak and their central banks have been printing money like mad.

The truth could not be more opposite.

In short, the Dollar/Yen f/x rate is out of whack with regard to expectations about the position of relative monetary policy, and the suppression of bond yields in Europe is a front running intervention funded by flows from Japan and Switzerland in anticipation of a policy change that will get them off their positions.

Is Trade Too Far Out in Front of ECB and BOJ?

This is the million-dollar question.

The BOJ certainly made the market yawn, and the ECB’s policy doesn’t kick in for two months. In all likelihood the policy will simply help bridge flows from the bond market to equities. Still, there is a chance the whole thing is too little too late. At least in our view it is worth considering a short against US equities.

Which Reserve Currency to Short?

I agree with my partners that the Japanese and European government bond markets are going to get creamed. Where I disagree is on the currency effects. I believe the US dollar has most to lose from it.

But in Japan I foresee a deflationary boost to the Yen, which will undermine and reverse the carry trade from which both Europe and the US have benefitted. The rhetoric spoken by the BOJ and the reality of its policies have never been further apart. It may be that they will ultimately print at a faster pace, but so far they have been the world’s most conservative central bank –their insane debt/gdp ratio notwithstanding.

Yet it has so far avoided the temptation of re-inflating (since the late eighties), despite what it is saying in public.  But aside from the relative conservatism of the central bank, even now, after the deflation has allegedly ravaged their economy for two decades, the yen is scarcely overflowing investment portfolios, and most of the government’s bonds are owned by local banks, the government’s pension fund, private insurers and other domestic hands.  A structure like this has to be easier to control than the over-owned and over inflated USD / UST.  So while the Japanese government is most vulnerable to a back up in bond yields it is also in the best position to negotiate with its creditors and to use many other (fiscal) tools to get their way.

If you step back from the forest it is evident who are the leaders of the current inflationist regime: it’s the Fed, BOE, and ECB.  The Japanese have always been reluctant partners.  The Swiss occasionally dissent.

For Most of the World, It’s Been Downhill Since 2008

If anybody thinks that the trends of the past few years are anything other than a financial distraction orchestrated by central bankers, their cronies and political allies they need only look around them.

This weekend I went through chart after chart, probably reviewing hundreds of charts for stock averages around the world, only to find that only one in three have recovered and surpassed their 2008 peaks.

What was not surprising in the least is that those that most succeeded in this feat were those that had inflated their money stocks the most.  The stock markets that were more than 50% higher than their 2007-08 peaks included Argentina, Pakistan, Philippines, Thailand, Turkey, and the US -where the Transports and NASDAQ are up 60% over their peaks in the 2007-08 top.

The Dow and S&P 500 large caps are up 20-30 percent over this period as well, followed by stock markets in New Zealand, India, Mexico, Germany, Sweden, and Israel.  What these countries all have in common, except Sweden, is that they have run the most aggressive monetary policies among their peers in the post 2008 economy, and the correlation between that and their stock returns is unsurprisingly strong.

The average analyst will tell you that this only proves that the central banks did the right thing in those countries since that is where the most growth (by their measure) has occurred.

But I will tell you that those analysts are confused about what causes growth and what growth is; and i will tell you that central banks didn’t cause growth -if any exists.

They have merely papered over the government’s problems and created an untenable distraction in asset markets that has introduced a slew of new imbalances and brewed new problems at the expense of capital -or the true source of growth, wages, prosperity, etc.

It is no surprise the policy produces an asset and investment boom, but it doesn’t produce one that is geared toward consumer needs (sustainable), and it always ends up wasting either existing capital (through malinvestment or consumption) or potential capital that could have come into existence (the unseen).