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Endgame ahead

Archive for the ‘Economics’ Category

Summarizing the current state of the markets

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Grant Williams did it again at last months ASFA national conference, summing up the recent developments of equities and government bond markets, giving an outlook on what’s to come in next couple months and years… Fun to watch as always, even though it’s really nothing but depressing if you thing about it. 30 minutes well spent:

Written by mo

December 13th, 2013 at 12:07 pm

Best of Bernanke – before the crisis

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Remember the time before the 2008-201x economic crisis?

And that’s the guy who has been running the Federal Reserve for the last decade, printing (“not literally”) trillions of dollars to “benefit” the worlds biggest economy…

keep-calm-print-more

Written by mo

July 31st, 2013 at 10:14 am

Posted in Economics,United States

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Deck the Halls with Macro Follies

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Just in time for Christmas, EconStories has done it again…

THE ECONSTORY:
Each year, our attention turns to the holidays… and to holiday consumer spending! We’re told repeatedly that, because consumer spending is 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth.

This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago. Malthus believed recessions where caused by “underconsumption” because there was a “general glut” of goods unsold. To recover from a recession and grow, we needed to stop all the saving and spend more to buy up all the goods on store shelves. Savers are like the miserly Ebenezer Scrooge. If you want a happy holiday, you’ve got to clear those shelves and give people a reason to produce more and create jobs. Or so Malthus thought.

John Maynard Keynes resurrected this approach and built on it with his influential “General Theory”, which now underpins much of our government policy and public discussion of spending and economic growth. Keynesians believe aggregate spending drives the economy and savings is a “leak” out of the flow of spending. Indeed, this economic philosophy underpins many people’s widespread obsession with retail sales each holiday season. Keynesian Macro Santa’s sack is filled with spending.

But there is another view on recessions, recoveries and growth.

Classical and Austrian economists such as Adam Smith, Jean-Baptiste Say and Friedrich Hayek viewed savings as the vital lifeblood of economic growth and production as the means by which we live better and consume more in the long term. Our savings aren’t simply taken out of the economic system, but become the source of capital that entrepreneurs use to create new goods and increase productivity. These economists believe this increased productivity is the key to a wealthier world. Before we consume, we must effectively produce what others value — at prices that cover the costs. This fundamental idea, that our demand for goods is enabled and constituted by our supply of other goods came to be known as the “Law of Markets” and later “Say’s Law”. For classical and Austrian economics, recessions happen when producers make mistakes. They create goods that can’t be sold at a profit. These malinvestments tend to cluster in a recession as a result of systematic problems, such as disruptions in the financial system that cause monetary “disequilibrium”, often as the result of government interventions in the economy since they can be system-wide.

Recovery and growth in the classical and Austrian view is driven by restructuring production so that entrepreneurs discover again the best — i.e. the most valuable and sustainable — ways to serve customers. That process is lead by new entrepreneurs and driven by savers who make capital available to fund new investments and new ventures. Sustainable saving and investment means creating more value for others while using fewer resources. This process lies at the core of healthy economic growth, including better job opportunities and a rising standard of living. If there are problems in the financial system such that our savings aren’t effectively being invested but sitting idle in bank vaults, or people are hoarding cash under their mattress in distress, a classical approach seeks to get the root of that problem and resolve the monetary problems with monetary solutions such as increasing the money supply to meet demand and other approaches. Using up more real resources through additional consumption in such a case is a applying the wrong medicine to the disease.

Consuming is our end goal, but producing value must be the means to that end. That is to say, Macro Santa’s sack is filled with saving.

So which approach do you think is right? We favor the Smith-Say-Hayek approach to economic growth. Share your thoughts!

Written by mo

December 5th, 2012 at 7:23 pm

US downgraded to AA-

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Following yesterdays QE3 / QE∞ the United States has just been downgraded again, this time from AA to AA- thanks to Egan-Jones:

Up, up, and away – the FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US.Some market observers contend that a country issuing debt in its own currency can never default since it can simply print additional currency. However, per Reinhart & Rogoff’s ” This Time Is Different: Eight Centuries of Financial Folly ” , p.111, 70 out of 320 defaults since 1800 have been on domestic (i.e., local currency) public debt. Note, US funding costs are likely to slowly rise as the global economy recovers or the FED scales back its Treas. purchases (75% recently).

From 2006 to present, the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%. We are therefore downgrading the US country rating from “AA” to “AA-“.

Ratings History:
Egan-Jones rating history for United States (Govt of).
9.14.12  AA to AA (-)
4.15.12  AA+ to AA (Negative outlook)
7.16.11  AAA to AA+

And since Egan-Jones hit-ratio (meaning the ratio at which S&P and Moody’s follow their rating) of well above 90%, expect the major rating agencies to downgrade as well within the next week or so.

Oh, and about that inflation…

Written by mo

September 14th, 2012 at 10:09 pm

Fed announces another round of QE

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A few hours ago the Federal Reserve has announced another round of QE, because… you know, it worked so great the last time. And the time before that. And every time they had to extend it. That’s why the US economy is now in such a great shape, they need even more QE. Makes sense, doesn’t it?

This time, instead of buying treasuries, it will be MBS. 40 billion worth, each and every month until… well, who knows? Certainly not chairman Bernanke, because when asked about that minor detail during the Q&A session of the press conference, all he could say was until unemployment rates are at an acceptable level again. No target, no hard figures – we’re making it up as we go.

But to make a long story short, Congressman Ron Paul managed to sum it up within the first 90 seconds:

Update, a day later: While some of the usual suspects are still cheering and the markets (especially Europa and Asia, less so the US itself) were soaring, the first analysts who managed to keep their calm and are actually doing the math came up with some numbers just how bad this will likely end: BofA Sees Fed Assets Surpassing $5 Trillion By End Of 2014… Leading To $3350 Gold And $190 Crude  (hat tip to Bank of America’s Priya Misra)
Hint: Total outstanding public debt of the whole US is currently just above $16 Trillion, or about 3 times what the Fed is expected to have on their books within the next two years.

My projection: This whole debacle won’t turn out the way the Fed/Government/Investors/… are hoping for, instead it’s going to get ugly. Very, very ugly.

Written by mo

September 13th, 2012 at 10:49 pm

US GDP-to-debt crosses 100%

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Well isn’t that just swell? For the first time in 70 years the US debt/GDP today crossed above 100%. Almost exactly one year after the US downgrade at the beginning of August 2011. Happy Anniversary, I guess!

According to the latest data available from the Bureau of Economic Analysis (GDP at 6-30-12), U.S. Treasury (Public Debt at 8-2-12), and U.S. Census Bureau (Population at 8-4-12):
Public Debt $15.921 trillion
GDP $15.596 trillion
Population 314.090 million
Annualized Interest Expense $501.157 billion
Effective Interest Rate 3.39%

And the outlook at the current rate of progression? (Thanks to ZH)

2016:

  • Total US debt: $22.2 trillion (an increase of over $6 trillion from today)
  • Total debt per US taxpayer: $180,000
  • Debt to GDP: 130% (30% higher than today)
  • Food stamp recipients: 50 million
  • M2: $14.3 trillion (an increase of over $4 trillion from today)

and:

  • Total US Unfunded liabilities of $147 trillion (or $1.2 million per taxpayer)
  • $950 trillion in currency and credit derivatives, margined courtesy of TBTF banks’ cash deposits.

Written by mo

August 5th, 2012 at 10:46 pm

Charting the cost of Inflation

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With all that talk about Inflation, have you ever wondered how bad those measly 2 or 3 percent can be? Here’s a something to help you visualize your purchasing power decline over your typical work life (assuming it took 25 years to enter the workforce and you’re hoping to retire by 60). And that’s without any kind of hyperinflation – just steady 1-6% a year.

 

 

1% Deflation Baseline 1% Inflation 2% Inflation 3% Inflation 4% Inflation 5% Inflation 6% Inflation
100 100 100 100 100 100 100 100
1 101,0 100 99,0 98,0 97,0 96,0 95,0 94,0
2 102,0 100 98,0 96,0 94,1 92,2 90,3 88,4
3 103,0 100 97,0 94,1 91,3 88,5 85,7 83,1
4 104,1 100 96,1 92,2 88,5 84,9 81,5 78,1
5 105,1 100 95,1 90,4 85,9 81,5 77,4 73,4
6 106,2 100 94,1 88,6 83,3 78,3 73,5 69,0
7 107,2 100 93,2 86,8 80,8 75,1 69,8 64,8
8 108,3 100 92,3 85,1 78,4 72,1 66,3 61,0
9 109,4 100 91,4 83,4 76,0 69,3 63,0 57,3
10 110,5 100 90,4 81,7 73,7 66,5 59,9 53,9
11 111,6 100 89,5 80,1 71,5 63,8 56,9 50,6
12 112,7 100 88,6 78,5 69,4 61,3 54,0 47,6
13 113,8 100 87,8 76,9 67,3 58,8 51,3 44,7
14 114,9 100 86,9 75,4 65,3 56,5 48,8 42,1
15 116,1 100 86,0 73,9 63,3 54,2 46,3 39,5
16 117,3 100 85,1 72,4 61,4 52,0 44,0 37,2
17 118,4 100 84,3 70,9 59,6 50,0 41,8 34,9
18 119,6 100 83,5 69,5 57,8 48,0 39,7 32,8
19 120,8 100 82,6 68,1 56,1 46,0 37,7 30,9
20 122,0 100 81,8 66,8 54,4 44,2 35,8 29,0
21 123,2 100 81,0 65,4 52,7 42,4 34,1 27,3
22 124,5 100 80,2 64,1 51,2 40,7 32,4 25,6
23 125,7 100 79,4 62,8 49,6 39,1 30,7 24,1
24 127,0 100 78,6 61,6 48,1 37,5 29,2 22,7
25 128,2 100 77,8 60,3 46,7 36,0 27,7 21,3
26 129,5 100 77,0 59,1 45,3 34,6 26,4 20,0
27 130,8 100 76,2 58,0 43,9 33,2 25,0 18,8
28 132,1 100 75,5 56,8 42,6 31,9 23,8 17,7
29 133,5 100 74,7 55,7 41,3 30,6 22,6 16,6
30 134,8 100 74,0 54,5 40,1 29,4 21,5 15,6
31 136,1 100 73,2 53,5 38,9 28,2 20,4 14,7
32 137,5 100 72,5 52,4 37,7 27,1 19,4 13,8
33 138,9 100 71,8 51,3 36,6 26,0 18,4 13,0
34 140,3 100 71,1 50,3 35,5 25,0 17,5 12,2
35 141,7 100 70,3 49,3 34,4 24,0 16,6 11,5

 

Written by mo

July 5th, 2012 at 8:11 am

Posted in Economics

Tagged with

Overdose: The Next Financial Crisis

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Journeyman pictures recently put up the 45 minute long documentary Overdose: The Next Financial Crisis. It’s currently 2 years old (first published in July 2010) but now you can watch if for free on YouTube. So, two years later – can you spot how many of the predictions came true?

With the US raising their debt ceiling, are we in a global bail-out bubble that will eventually burst? This doc offers a fresh insight into the greatest economic crisis of our age: the one still awaiting us.

The financial storm that has rocked the world began brewing in the US when congress pushed the idea of home ownership for all, propping up those who couldn’t make the down payments. When it all went wrong the government promised the biggest financial stimulus packages in history and gargantuan bailouts. But what crazed logic is that: propping up debt with more debt? “They’re giving alcohol to a drunk: it just sets him up for a bigger hangover.”

July 2010

Written by mo

July 3rd, 2012 at 9:53 am

Spain gets a bailout

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Who’d have thought – looks like Spain will get a bailout for their banks as well:

The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect.

The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request.

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total.

Following the formal request, an assessment should be provided by the Commission, in liaison with the ECB, EBA and the IMF, as well as a proposal for the necessary policy conditionality for the financial sector that shall accompany the assistance.

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The  Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.

The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector.

We invite the IMF to support the implementation and monitoring of the financial assistance with regular reporting.

What’s that? Only 100 billion Euro? Hardly worth mentioning then…

Of course it’s just for the banks, not for the government. After all, as everyone knows, it’s only the banks that are broke, not the country itself. Rest assured, your bonds are totally safe and not just a bunch of paper, worth hardly more than any other empty promise. But why safe the banks then? Why of course so they can continue buying those government bonds, as nobody else in their right mind would buy them…

Update, June 11th 2012: Guess what? Looks like the bailout already starts to fall apart

Nothing like figuring out your hare-brained bailout attempt was a failure from the beginning. Ok: Here are the problems with this band aid:

  1. Unfunded
  2. Temporary, and eventually will be replaced by the ESM. Markets can, luckily, still discount.
  3. Negative pledge issue still exists as Finland made all too clear. Countries will demand extra security interest while under EFSF regime and until ESM priming comes in play.

Finally, all of this, is just semantics.

Well, that didn’t take too long.

Written by mo

June 9th, 2012 at 8:06 pm

End of the Road – How Money Became Worthless (Trailer)

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Ever dreamed of getting all the fiat money skeptics together at the same time, all in the same place? Your dream has now come true, courtesy of “End of the Road – How Money Became Worthless.”

Watch the teaser below.

End of the Road Documentary Trailer from Tim Delmastro on Vimeo.

Is the financial crisis over, or are we heading towards disaster? End of The Road portrays eleven influential commentators within the finance and investment communities, as they share their knowledge of our current financial structure. Through each of their narratives, a story is built which chronicles the current economic dilemma and paints a picture of the world’s financial future.

I’ve no idea when the full movie will actually be released, since as of now, the website seems to be down for exceeding its bandwith limit.

Update, April 2012: As of now you can sign up on their website to get an notification as soon as the movie is about to be released.

Wall street is being occupied. Europe is collapsing in on itself. Around the world, people are consumed by fear and anger, and one question is on everyone’s lips: Is the financial crisis over, or are we headed towards economic disaster?

End of the Road is a 55 minute documentary film that chronicles the global financial collapse. Told in an entertaining and easy to follow style, the film tells the story of how the world came to be in such a state, from the seeds sown after WWII, to the current troubles facing us today, and to the possible future that may await us all. Some of the world’s top economic minds share the hidden tale behind the mishandling of the world’s finances, give insight into how bad policy and a flawed monetary system joined together to create a catastrophe.

End of the Road portrays eleven influential commentators within the finance and investment communities, as they share their knowledge of our current financial structure. Through each of their narratives, a story is built which chronicles the current economic dilemma and paints a picture of the world’s financial future.

Cast
Peter Schiff
Eric Sprott
James Turk
Bill Murphy
Alasdair Macleod
Jim Puplava
G Edward Griffin
Mike Maloney
James G Rickards
Adam Fergusson MEP
Dimitri Speck

Written by mo

March 22nd, 2012 at 10:01 am

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