Dysfunctional markets and democracies

There are so many similarities with the late 1920s and today that it is eerie.
Back then there was popular discontent with the status quo and trade wars were looming. Stocks today are almost as expensive (using the price-earnings ratio as a gauge) as they were on the eve of the 1929 crash.

www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/03/09/20170314_shiller1.jpg

What's more, the Fed (as they did prior the 1929 stock market crash) also raised the Fed fund rates into a lacklustre economy.

But what is unusual about the financial markets today is that we see government bond prices and stock prices moving downwards in tandem, in other words, capital outflows from both bond and equities. Typically, when investors sell bonds (say due to an improvement in the economic outlook) capital tends to rotate into risk assets, equities which provide potentially higher dividends in good times.

However, this inverse relationship between bond and equity price no longer holds water and this could be telling investors/traders something. In short, today's financial markets have become somewhat dysfunctional.
When asset prices fall together (bonds, equities) this could be a withdrawal symptom of hyper-inflationary quantitative easing (QE) policy of the central bank unwinding. Asset prices today are not determined by equilibrium fair market price instead, they have become a function of the central bank's liquidity.
But when the central banks withdraws monetary stimulus, in other words, moves towards interest rate normalisation policy and winds back QE the market becomes unstable.

So a period of dysfunctional markets and democracies lies ahead.
Indeed, the trickle up wealth effect of abusive monetary policy has facilitated unprecedented wealth distribution from the middle to the top of the food chain and that is slowly killing the golden goose-household consumption.
Zero nothing economic growth, peak debt and lacklustre consumption have become the new norm. So retailers are struggling to break-even, cutting cost and closing down brick and mortar stores. The proliferation of ghost shopping malls
www.cnbc.com/2017/02/24/malls-to-become-ghost-towns-jim-cramer-says.html

Malls to become ghost towns, Jim Cramer says - cnbc.com
www.cnbc.com

Malls are likely to become "ghost towns" as more consumers shift to online alternatives, CNBC's Jim Cramer said on Friday. On Friday, J.C. Penny told investors that ...

and empty commercial real estate with late reminder payment mail piling up on the doorstep is again appearing on the high street. The list of retailers filing for bankruptcy in 2017 is a red flag for investors/traders.
www.marketwatch.com/story/retail-industry-is-expected-to-replace-oil-and-gas-as-2017s-distressed-sector-2017-02-15

From a risk-of-bankruptcy standpoint, the retail business ...
www.marketwatch.com

American Apparel is among a clutch of retail chains to have already given up the ghost and filed for bankruptcy protection. Move over, oil and gas. Retail is set to ...

So if households are struggling to make ends meet in the new gig economy that means retail sales are declining too. If retail inventory is rising that also means that manufacturers' order books are also in decline.
German manufacturing order dropped 7.4% in January.
www.ft.com/content/607fb692-85be-3bd8-b9bc-9c6dd39a1400

Meanwhile, the revolving doors between government and the major commercial banks ensure that the elites continue to syphon off their undeserving wealth for doing absolutely nothing.
George Osborne, former UK chancellor, cocaine user
www.youtube.com/watch?v=EXngyi4WoWM

George Osborne off his face on cocaine again?
www.youtube.com

Remember him in the Commons? Away with the fairies! Check his performance out here. Listen to his tone and look at his eyes. This guy the next PM off his tits on ...

and history graduate (let's face it the finest intellects don't read history at university) is earning £650,000 a year for working one day a week at the world’s largest investment manager.
www.thetimes.co.uk/article/osborne-is-paid-650-000-for-one-day-a-week-5wjb8rql0

But we live in a something for nothing culture and the higher up the food chain you are the bigger that something is.
So the dimwit western policy makers (mainly history graduates from elite universities) have now come up with what they believe to be a brilliant solution to this dying economy (better known as a “weak economic recovery”) scrap benefits and pay everyone a universal basic income (UBI).
Hooray for UBI! What a socialist utopia, it must have been dreamt up in a pot smoking session.

Here is a sobering thought. If everyone consumes and nobody produces we all starve. This something for nothing culture at both extreme ends of the food chain is likely to collapse the western system and it is probably why we have reached peak debt (peak madness, peak agro) today.

Speaking about those who produce the food, the farmers how are they feeling these days? Are the farmers rattled by the trickle up wealth effect policies of the government and the extend and pretend debt that is bleeding their nation dry?
www.zerohedge.com/news/2017-03-14/powers-be-have-looted-everything-greek-farmers-fight-riot-police-shepherd-crooks

As we can see in Greece unsustainabledebt, followed by harsh austerity is a catalyst for massive civil unrest.

Anyone who believes that we are not currently in a crisis is living in denial.
Markets become dysfunctional in a crisis, the price mechanism breaksdown and so too do democracies.
Frankly, the electorate is so irate with the status quo that if given a chance they would probably vote in a street hooker as a leader (even if it were just as a protest vote).
We are seeing this play out in Europe with Brexit and the rise of other anti-EU parties which is challenging Europe's post-WWII order.
But breaking up the EU is akin to demolishing the house because the lights don't work.
The electorate is voting to knock down the political foundations that provided Europe with peace and prosperity for decades. The sensible thing to do would be to reform the EU inside the European Parliament. But in a crisis not only do markets fail so also do democracies, after all, that is how Hitler and Mussolini came to power.

Will Trump Smash the Fed?

So the US economy is nearing its inflation target of 2% and the latest payroll data suggests that employment is also better than anticipated with 235K jobs created in February versus 175K jobs expected. Perhaps the stage is being set for a Fed rate hike normalisation quicker than that what the market anticipates.
But it is the record US public deficit which has now surpassed 20 trillion dollars that could come into focus going forward.
Will Congress raise the debt ceiling (the upper limit of money that the US government can borrow to meet its debt obligations) on March 15? The economy is experiencing modest growth expanding by 1.9% in the final quarter of 2016. Moreover, that reconciles with an increase in total tax receipts of 0.5% over the first four months of the year.
www.economiccalendar.com/2017/02/10/us-registers-january-federal-budget-surplus-of-51-3bn/

US Registers January Federal Budget Surplus of $51.3bn
www.economiccalendar.com

The January US Federal Budget recorded a surplus of $51.3bn compared with a surplus of $55.2bn the previous year and compared with consensus forecasts of a surplus near $40.0bn. The US usually posts a budget surplus for January with strong tax receipts on seasonal grounds and before tax refundskick-in. For the first four months ...

Public debt is less burdensome when the economy is expanding but it would need more than lacklustre economic growth. Furthermore, when the Fed's fund interest rates are low the cost of servicing the debt is also low. But that is likely to change when the Fed starts moving towards its goal of interest rate normalisation. That also means highly leveraged governments and corporates could be burdened with higher debt costs going forward.

So the US economy is shouldering a cumbersome public deficit at a time when the Fed is keen on raising rates. Put another way, the US economy might need to grow more than just 2% or 3% to sustain debt payments. An economy boom would be ideal.

How then would an economic boom (GDP greater than 5%) be achieved when the population is ageing and the pool of young fit working-age group is diminishing.
Natural population growth is in decline as generation X struggles to pay off student debts and achieve financial independence in the gig economy. Without a stable income the next generation is less credit worthy, if they can't secure a mortgage, they don't buy houses, cars, and start a family. So the indigenous population declines and the working population ages and then retires.

Meanwhile, resources are diverted to the ageing population needs (but this is a sunset economy) which will transition from dusk to night, it has no long-term future in a failing economic model that leads to population decline with fewer younger people.
Short term fix, an injection of young blood (sustainable immigration) into the economy could reduce the negative impact of an ageing workforce, lower worker productivity and population stagnation or decline.

There is a correlation between an ageing, declining population and lower economic growth, Japan is s good case study. The human farmers (or chosen few who print the money) don't create the wealth or economic prosperity, instead, it is the sweat, toil, innovation and enterprise of their human livestock which creates real wealth and prosperity. In a few words, increasing the money supply doesn't create economic prosperity it just makes fiat currency (which has no intrinsic value) less valuable. So when the central bank (human farmers) issue more fiat currency that means, even more, currency is circulating in the economy and chasing the same or fewer goods and services (provided by their human livestock), which then leads to higher prices. Put another way more currency is needed to buy the same good or service which is the definition of inflation.

It would be inaccurate to say that the greatest monetary easing experiment in the history of finance (implemented by the central banks following the financial crisis of 2008) did not create inflation.
This unprecedented amount of monetary easing implemented by the central bank's quantitative easing program did indeed create hyperinflation or (asset bubbles) in government bonds, stocks, prime real estate and many other trophy assets owned by the super rich (super luxury yachts, paintings, classic vintage cars, precious stones..)
Monetary policy is being implemented by those at peak of the food chain for their own economic gain. The easy money circulated amongst the top hierarchy of the food chain has enabled this group to speculate and accumulate wealth beyond their wildest dreams. So the trickle up wealth effect of abusive monetary policy has facilitated an opaque transfer of wealth from the middle class to the chosen few. Perhaps it has even added to this demographic time bomb.

The trillions of dollars of newly created currency were not channelled into productive investments or public works. Today the infrastructure (roads, bridges, drains and sewerage systems, transport infrastructure, ports) of many G7 economies is in need of investments.
But when easy money can be made on the speculative casino inflating asset bubbles, buy today sell tomorrow and make a killing. So why bother doing anything tangible with capital when fortunes can be made on the financial casino, creating nothing making nothing. What's more, boosting shareholder value becomes not much more than corporate stock buybacks with the cheap money.

So the CEOs reduce CAPEX spending, thereby employing fewer people and employing capital in stock buybacks.
In short, a few people got very rich at the expense of everyone else. It is how just 62 of the richest people have as much as half of the world's wealth.
http://money.cnn.com/2016/01/17/news/economy/oxfam-wealth/

The 62 richest people have as much wealth as half the world
money.cnn.com

Growing inequality has added to the net worth of the world's richest billionaires, according to a new Oxfam report.

This type of wealth inequality could only have been financial engineered.
Trump has come to power riding the populous revolt anti-establishment wave.
There is an image of President Trump in the oval office speaking on the phone with a portrait of former President Andrew Jackson hanging on the wall behind him.
www.washingtonpost.com/news/post-nation/wp/2017/01/31/andrew-jackson-was-a-rich-populist-who-bragged-and-invited-scorn-trump-is-drawing-new-interest-in-the-7th-president/

Andrew Jackson was a rich populist who bragged and invited ...
www.washingtonpost.com

Andrew Jackson was a rich populist who bragged and invited scorn. Trump draws new interest in the 7th president.

What does the 45th president see in the 7th president?
The two presidents do have a few similarities, both wealthy populists battling against the establishment of the day.
Moreover, it was only recently that Andrew Jackson was removed from the $20 USD note.
www.huffingtonpost.com/entry/harriet-tubman-20-bill_us_5717a6f5e4b0060ccda50d8b

Harriet Tubman To Replace Andrew Jackson On $20 Bill | The ...
www.huffingtonpost.com

Treasury Secretary Jack Lew announced Wednesday that Harriet Tubman will replace former President Andrew Jackson on the $20 bill. In a call with reporters

It just wasn't considered politically correct to have a former slave owner (which is like employing the service of domestic cleaner on the minimum wage today) on the note.
Was Jackson taken off the note due to his anti-central bank speech?
www.silverdoctors.com/gold/gold-news/andrew-jacksons-speech-against-central-banksters-as-true-today-as-in-1832/
"Controlling our currency, receiving our public money, and holding thousands of our citizens independence, it would be more formidable and dangerous than the naval and military power of the enemy…."

But what do Trump and all his billionaire bankers have in common?
The gold curtains, Jacksons portrait hanging above him- is Trump communicating to us through symbols his intentions? Will the 45 president attempt to smash the central bank, introduce a gold back dollar, or is Trump just part of an elaborate psychological operation to lull the population back to sleep?
Time will tell.

The economic wheels continue to spin in the euro bloc

Eurozone economic indicators have overall been benign, the economic wheels continue to spin, albeit slowly. Eurozone GDP growth advanced 0.4% in the quarter three months to December of 2016.
www.tradingeconomics.com/euro-area/gdp-growth

Euro Area GDP Growth Rate | 1995-2017 | Data | Chart ...
www.tradingeconomics.com
Euro Area GDP Growth Rate 1995-2017 | Data | Chart | Calendar | Forecast The Eurozone economy advanced 0.4 percent on quarter in the three months to December of 2016 ...

While this may not seem like fireworks the euro bloc is no longer the worse performing economy of the major advanced developed economies. At the bottom of the list came Japan with its economy barely growing in the final quarter of 2016, posting just 0.2% growth. The UK economy outperformed the EU's by a slight margin growing 0.5% in Q4, 2016.
Then there is a gap with the top performers shooting ahead. The second best-performing economy was the US which expanded by 1.9% in the final quarter of 2016.
At the top of the list, leaving all other economies well behind in its rear mirror is China with its economy expanding by 6.8% during the same period.

Nevertheless, let's not discount the fact that euro bloc economy is battling some fierce political headwinds. A nationalist popular sentiment is sweeping the continent. First with Brexit, then with the French presidential elections scheduled to be held on May 7 will most likely be the euro bloc's pivotal point. The EU's existence (post-WWII order in Europe) together with the fate of the euro stands in the balance. Indeed, should the French electorate put in power Le pen's far right Nationalité (National Front) party the EU project and the euro are doomed. That is the sharp reality.

But the Euro is also a pillar of support for the entire western financial banking system. Euro sovereign bonds are the collateral that commercial banks pledge to raise finance.
If the Euro were to collapse so too would the value of Euro bonds which was valued at 20.3 trillion euros in 2014.
www.bloomberg.com/news/articles/2014-09-24/europe-s-20-3-trillion-euro-bond-market-shrinks-as-banks-retreat

Europe's 20.3 Trillion-Euro Bond Market Shrinks as Banks ...
www.bloomberg.com
Europe's 20.3 trillion-euro ($26.1 trillion) bond market is shrinking as financial institutions repay debt, according to Citigroup Inc. analysts in London.

This doom scenario would play out something like this;
Investors (commercial banks) would be left holding worthless euro bonds and in a desperate attempt to raise their capital base they would freeze credit, (perhaps even call up loans) and sell other assets too. The great unwinding of stocks and real estate would follow leading to a Great Depression scenario, the collapse in the value of all asset classes, real estate, bonds, equities.
Europe's largest bank, Deutsche Bank with its €46 trillion derivatives book exposure would soon be declared insolvent. The almost simultaneous collapse of the euro, euro bonds and Europe's largest bank would blow the collateral chains off the entire western banking system, thereby making the 2008 financial crisis (triggered by Lehman brothers) look like a picnic.

With bank closures, credit frozen just in time Inventory management system would breakdown.
Then the situation would rapidly deteriorate.
Grocery stores would run out of food supplies within days. The hungry, angry mass of people would take to the streets (what would they have to lose), social order would collapse within weeks.
How are bankrupt governments going to pay the salaries for law and enforcement officers to keep the peace and maintain law and order?
Frankly, it would be a mad max scenario.

That is why I don't believe it is going to happen. Think about it, if the forex market, the precious metals market, the LIBOR market is rigged then everything worth fixing is "fixed."
The western elites would have too much to lose from a Le pen victory, EU disintegration, euro collapse and a financial apocalypse. So my two cents worth is that Le pen won't be permitted to win.
However, having said all the above I am also a little spooked by the article below.
www.bbc.com/news/world-europe-37155060

Germans told to stockpile food and water for civil defence ...

www.bbc.com

For the first time since the Cold War the German government is advising citizens to stockpile food and water for use in a national emergency. Some opposition MPs said ...

The worse trait you could have as an investor/trader is being over confident. Remember the golden rule; no trade position in your portfolio should be big enough to crush you if it goes horribly wrong.

While I don't believe Le pen will win, and the contrarian trade (risk on EU assets, particularly European banking) could be the play of 2017. However, it would also be prudent to hedge against that position in the unlikely event of a disaster (EU disintegration and collapse of the euro). Don't become another statistic-another trader/banker jumping from a high window.

So let's assume Le pen fails to secure an election victory in the May French Presidential elections.
If the eurozone economy has managed to push against the political headwinds of anti-EU parties and still posted a modest economic growth in Q4, 2016 what would the bloc's economy do when those headwinds are lifted?
Put another way EU assets could be undervalued, assuming a Le pen failure.

ECB President Draghi's less dovish tone this week underscores the fact that a sense of urgency has gone.
Draghi said the "balance of risks to growth has improved" and noted that The ECB had "removed reference to signal a sense of urgency."

So it will be very interesting to see how all this plays out (since the outcome will have an impact on everyone). Meanwhile, euro and euro stocks continue to recover as I write this piece.