In response to an FT article by Gillian Tett on 11th August 2016, entitled ‘Investors stockpile cash to offset economic despair’
“August has so far been notable for yet another set of bizarre market signals” – Gillian Tett
Thanks Ms. Tett – you are drawing attention to the underlying forces that are at work, rather than getting bogged down in the intellectual sludge that is dished up by central bankers, and then regurgitated by a media still in thrall to their delusional picture of how the real economy works. The bizarre nature of market signals has barely started. When I read your opener, the words of Bachman Turner Overdrive immediately sprang to mind
“You ain’t seen nothin' yet”
This is an Alice in Wonderland market where nothing is how it seems. Indeed we are falling foul of the Trades Description Act by even calling this a ‘market’ – it isn’t – it would be better described as a ‘twisted contraption’.
‘Markets’ bring together the wants and the needs of millions of people – price signals are the language of the markets. Replacing this language with the hubris of group of increasingly frightened academics and bureaucrats cannot, and will not work. You cannot manipulate a capitalist system from the top down. You don’t get increased productivity and innovation in a centrally controlled system – you get stagnation and eventually catastrophe. Our system of monetary politburos is well on the way to the latter.
Creativity and innovation are messy – trying to control the messiness – produces fragility – and that’s what we’ve got. In their insane belief that a group of twelve academics can set the most important price in capitalism – the price of money – they have created a fragile system that requires their constant fiddling and jawboning just to stop it falling down.
One huge signal that CBs are still asleep to is that negative interest rates are not stimulative – they are deflationary. Businesses will not make long-term capital investments in this environment. What they will do, and what they are doing, is to buy back their own shares, and/or park money overseas where they can get some yield. Meanwhile individuals, particularly those with money to spend – older folks - look at their pension plans and say to themselves ‘I need to save more’. This isn’t rocket science unless you spend your days thinking a spreadsheet will tell you more than real people, unless you believe ‘economics’ is mathematics – it isn’t.
There are other insanities. For example:
This week Bloomberg reported that institutional investors outside the US are buying US 30 year paper at 2.3% in order to get some yield. Fair enough you say…but…if you are investing in a foreign currency you have to hedge against the dollar… the cost of hedge is mounting…and is on the way to making US bonds negative for the rest of the world.
NIRP is perhaps the biggest signal of insanity. We now have circa $12 trillion of bonds with negative yields. This is slowly destroying pension funds, insurance companies, and savers. On the other hand it provides a field day for speculators, front-runners, Wall Street skimmers…and insolvent governments.
In conclusion - we have an economy that is carrying an increasing burden of debt. The US is running deficits of 3% and therefore requires nominal growth of 4% in order to carry this debt. The nominal growth over the last 4 quarters was 2.73% - the arithmetic doesn't work. We need an increase in creativity, innovation and investment to generate 4%...but we have an environment dominated by a group of people whose actions are in direct opposition to that.
These folks will never admit they are wrong, and therefore they need to be stopped. The politicians won’t do that, so what happens? Well…they will be stopped…but it will be by the bond markets. Sooner or later, the last of the confidence in CBs will dissipate - and when it does, capital will flee from sovereign debt, volatility will go through the roof, and much of the big money that is now effectively ‘parked’ in bond markets around the world will take refuge in other assets – e.g. in the dollar, in large stocks, in gold and in other tangible assets. The thing that CBs and mainstream economists have never really understood in their hubristic quest for control is this - you cannot abolish market forces indefinitely.
‘Sooner or later everyone sits down to a banquet of consequences’
Robert Louis Stevenson