On Monday, Bill ‘The Bond King’ Gross released his monthly missive to the market. These are invariably entertaining, and always thought provoking - because he’s been in the thick of it for 35 years. Even when I think he's 'off' he's worth listening to because people follow what he says - so it's useful to know what he's thinking. This month he had a number of very interesting things to say about government debt, negative interest rates, and where he’s putting his money…you know…trivial stuff like that:
On ‘return free risk’ assets – (respect to Jim Grant for coining that term):
“When investable assets pose too much risk for too little return...low/negative yielding credit is exchanged for figurative and sometimes literal gold or cash in a mattress. When it does, the system de-levers…as cash at the core, or real assets like gold at the risk exterior, become the more desirable assets. Central banks can create bank reserves, but banks are not necessarily obliged to lend it if there is too much risk for too little return…
On low interest rates:
“… Low interest rates may raise asset prices, but they destroy savings and liability based business models in the process. Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits. Central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates…”
On central bank ‘promises’:
“…central banks rebate almost all interest payments to their respective treasuries, creating a situation of money for nothing — issuing debt for free. Central bank "promises" of eventually selling the debt back into the private market are just that — promises/promises that can never be kept”
On the sustainability of the Ponzi scheme:
“Almost all assets are a bet on growth and inflation (hopefully real growth) but in its absence at least nominal growth with some inflation. The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income, allocating a portion to interest expense and another portion to theoretical or practical principal repayment via a sinking fund. Without the latter, a credit-based economy ultimately devolves into Ponzi finance, and at some point implodes. Watch nominal GDP growth. In the U.S. 4-% is necessary, in Euroland 3-4%, in Japan 2-3%”
So what is the nub of Mr. Gross’ comments?
1. In the US 4% nominal GDP is necessary to avoid implosion of the Ponzi scheme. (Nominal GDP is growth plus inflation). The reason Mr. Gross is using 4% as the figure is because US budget deficits are running at 3% a year
2. Annualized growth for the past four quarters has been 2.0%, 0.9%, 0.8% and 1.2%. Thus - average annualized real growth is running at 1.23%.
3. The inflation figure that the Fed uses for its calculations is running at 1.5% (this is not what you or I would call the cost of living…the Fed are totally disinterested in that because it’s too upsetting to their theories).
4. With 1.5% inflation and 1.23% real growth, nominal growth is still only 2.73%. That’s is quite a way short of the 4% required just to keep going…
Let me bottom line this for you dear readers…we’re screwed
On Thursday the FT ran an article entitled ‘Head of child abuse enquiry quits’
'Lowell Goddard, the judge leading the independent inquiry into child abuse in England and Wales, resigned unexpectedly on Thursday after just 16 months in the job.
Justice Goddard, who previously investigated police handling of child abuse in New Zealand, is the third person to resign from the investigation, raising deep questions about the pressures she has faced. It marks another crisis point in the effort to reveal the truth and justice for alleged victims of abuse stretching back decades.
Two previous chairs - the retired British judge Baroness Butler-Sloss and the former lord mayor of London Dame Fiona Woolf — stepped down following questions over their links with key figures in the establishment.
In a terse, two-sentence letter to Amber Rudd, the new home secretary, Justice Goddard said she was resigning with immediate effect. Ms. Rudd said in response that “this will have been a difficult decision” but that it was “the right decision”.
Ms. Rudd said her priority was to keep the inquiry “on track” and that she would consult victims and survivors groups before appointing a successor. Neither Justice Goddard’s letter nor the home secretary’s response gave a reason for the resignation.
A report in The Times newspaper on Thursday criticised Justice Goddard for spending three months of her first year in the role either on holiday or overseas. An inquiry spokesman said she had spent 44 days in New Zealand and Australia on inquiry business and was entitled to 30 days’ annual leave”' - The FT
The suggestion being made is clearly that she resigned because she was criticized by a Murdoch rag for taking too much time off. I don’t buy it.
It's very easy to assume that ‘thin skin’, incompetence or lack of commitment are the explanation here, but I suspect there's much more to it than that.
The UK went to NZ to get someone not associated in any way with the people being investigated, and then that person resigns with no explanation offered or mentioned in reply? Something smells very 'fishy' about this.
Getting 'power' to admit it is wrong is hard enough, as Chilcott and Hillsborough have shown. Destroying the reputation of people who consider themselves above the law, bringing to light the complicity of people who've turned a blind eye to it, sending public figures to jail for a crime that even convicted murderers find totally unacceptable...is something else entirely.
If I were cynical, which I unashamedly am, I'd entertain the idea that she's run up against a 'no-go' area or a threat of some kind.
There are some very powerful figures and public ‘names’ involved in this investigation. For decades, the Church, the state, and the BBC have 'housed' these people. They need to be investigated, and if found guilty, they need to be brought down.
And finally, how could I end the week without having another bash at getting the FT to wake up and smell the coffee:
1. There is global backlash happening against crony capitalism, and the morally and intellectually bankrupt establishment it serves
2. This is much deeper than a ‘perception’ problem
3. Donald Trump is a symptom of this backlash
4. Hillary Clinton is a representative and beneficiary of the corrupt system and will do nothing...zilch...nichts...nada to change it
5. Their fiddling, fudging and fawning is totally missing the point
The short answer is I couldn't...so I didn't...and I won’t...(there, that's telling 'em :-)):
On Thursday the FT magazine ran an article by Ed Luce that included a collection of superb black and white photos of Mrs. Clinton – the article was entitled “The making of Hillary Clinton: unpublished images of a would-be president”
Reader ‘R’ remarked:
"Can it get any more propagandistic than that?"
To which I replied:
"Sadly yes...this may be the first in a series of 'soft fawn' - an upmarket version of 'Hello'...tune in next week for the next episode of 'Luce Men and Women'...Volume Two: 'Ferdinand and Imelda Marcos - were they really that bad?'"
On Friday, again in the magazine, this was followed up with an article from Gillian Tett entitled ‘What Brexit can teach America’. As usual, and not surprisingly given she’s an anthropologist, this was slightly more ‘awake’ than the guff churned out by the pols and the economists.
“First — and most obvious — Brexit shows just how blind a political elite can be in a socially and economically polarized world. As my colleagues Gideon Rachman and Edward Luce have recently written, the Brexit vote was partly a protest vote — a howl of rage against economic pain, immigration and a loss of cultural identity. The only thing more surprising than this vote was that the UK elite was surprised by it; and the Democratic camp could easily repeat that mistake.
The second lesson is that the electorate is losing its fear of leaping into the unknown. Nobody can assume that Trump will lose “just” because he presents a risk. In a world where voters feel angry, taking a risk no longer seems so risky. And there is another important psychological issue at work: the electorate has just experienced a decade in which most of the rules of finance and economics have been turned upside down, as a result of the financial crisis. Turning the political rules on their head no longer seems so strange — at least, no stranger than seeing rates turn negative and big banks collapse.
That leads to a third lesson: revolution cannot be crushed by mere statistics or scare stories. Politicians such as Cameron tried to defeat the Brexit vote by citing economic data showing how dangerous Brexit might be; but voters dismissed it because they were too angry to listen — and too distrustful of the elite. The Brexit vote was decided on the basis of emotion — and the Remain camp failed to give voters a really positive vision of Europe. The Brexit camp, by contrast, invoked an image of an independent, proud sovereign nation that appealed to many voters.
This highlights a crucial fourth lesson: if the Democrats want to beat Trump, they cannot rely only on a US version of “Project Fear”; they need a positive and upbeat image too. Last week, the Democrats tried to create this at the Philadelphia convention. But they must recognise that Trump is campaigning on both negative and positive emotions; somehow the Democrats need to find a slogan as memorable and upbeat as Trump’s “Make America Great Again”.
A fifth lesson is that it is not just emotions that matter: the geeky details of the electoral process do too. One reason why the Remain camp lost in the UK was that turnout was low among potential young voters (who generally favoured Remain). Another issue was a little-noticed technical detail: parents used to be able automatically to register their teenage kids to vote, but this has recently changed. There are numerous “technical” details in the US electoral process that could turn out to be even more important; particularly since strategists — on both sides — are skilled at using all the loopholes they can find to get their supporters out, or suppress the other side. Pundits who want to predict the November results must look hard at the electoral weeds.
And that brings us to the sixth and most important lesson from Brexit: that democracy, by its nature, is unpredictable, particularly as social polarization is increasing. Elites might hate this. So might investors or businesses, which need to plan for the long term. But if the whole point of democracy is to give people a voice, there will always be a risk that this voice will either howl in rage — or sit at home and not speak at all. Americans had better hope that the pundits learn this lesson ahead of time and — crucially — that politicians are ready to listen” - Gillian Tett
Thanks Ms. Tett
You are ahead of your colleagues as usual. But you are being very flattering to them when you say things like this:
"As my colleagues Gideon Rachman and Edward Luce have recently written, the Brexit vote was partly a protest vote — a howl of rage against economic pain, immigration and a loss of cultural identity. The only thing more surprising than this vote was that the UK elite was surprised by it; and the Democratic camp could easily repeat that mistake"
They have been very slow to get it. Some of your other colleagues are even further behind. The backlash was not, and is not, a surprise to many readers of this paper, and neither is the fact that the establishment did not, and still does not get it. If they did they'd be talking about how to address the issues that underpin the rise of populist and 'extremist' leaders, rather than just trying to persuade voters that they are listening - they're not listening - that's just more spin. If they were listening, they'd be looking in a mirror and taking responsibility, rather than obsessing over Trump. He's a symptom; he's not the disease. The establishment has done more to create the environment for Trump than he ever could.
All the talk is about how bad he is, but there's no naval gazing, no looking in the mirror. It's 'Trump is the devil' and 'Hillary must win'...I suspect the more enlightened of the elites think, though will not say openly, that they regard her as the lesser of two evils. Look at Mr. Luce's photo fest also in the magazine this weekend. Great photos, but the narrative is 'soft fawn' - it's a marketing job - the paper is turning into an upmarket version of 'Hello' magazine.
Here's what's missing:
1. Hillary Clinton will do nothing to clean up politics - there will be no reform of campaign finance, no term limits, no closing of revolving doors, no rule of law applied equally to all
2. She will do nothing to clean up Wall Street - she will 'dance with the guys that brung her'
Why not? - Because she's a symptom of what's wrong - she's deceitful, a flip-flopper who will double back on anything to win votes, a person who's never met a war she didn't like, and someone who is totally in hock to parasitic organisations like Goldman Sachs. When you 'owe' as many people as Hillary does, there's no clean up, there's payoff.
If the Democrats were serious about the issues they claim to be, they'd have chosen Bernie Sanders - and they quite possibly would have, had the DNC not been as bent as a bottle of French Fries.
Personally I doubt she'll make it - each tranche of emails will be worse than the last. As each one comes out, the establishment will demonstrate the same cluelessness that got them to where they are now - they will blame the Russians, they will spout 'Trump is in league with Russia'...anything but deal with the cronyism that the emails display. THAT is what the establishment does not get - this is much bigger than a new coat of paint, much bigger than pathetic words like 'I need to listen'.
The Democrats need a new candidate, otherwise they're going to end up with Donald Trump...and they still won't know how it happened.
In conclusion, I think we are entering what might be called ‘the quickening’ – that part of a natural cycle where the component forces in the system come together and move into a phase transition – it’s very messy. Amongst the geo-political upheavals and monetary mayhem happening on every continent except Antarctica, there are also three major elections coming up over the next year – the US, France, and Germany. The changes that are coming will affect everyone, but we will all be better able to cope if we are prepared, not just physically and financially, but mentally and emotionally too. It is always worse for the poor folks who are just going about their business leaving ‘the big stuff’ to the politicians - the smart people who know what to do. They're not and they don’t. Stay awake – as any boxer will tell you - it’s the punch you don’t see coming that knocks you out.
And on that happy note...that was the other news…Saturday 6th August 2016...a good weekend to all…I'm off to walk my dog and then watch the olympics...Best...MarkGB