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MN Gordon

MN Gordon

Making sense of the latest economic policy touted by the Federal Reserve or the U.S. Treasury is an exercise in befuddlement. No doubt about it, the economics trade is overcome with an abundance of nonsense these days. This is no coincidence. M.G. Gordon of Economic Prism looks to bring clarity to the muddy waters of economic policy.

Articles by MN Gordon

How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System

9 days ago

Bernanke Redux
Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.

Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all time. We are not worthy. – Click to enlarge
We couldn’t recall the last time we’d seen or heard from Bernanke.  But soon it all came back to us.  There he was, in the flesh, babbling on Bloomberg and Squawk Box, pushing the new paperback version of his mis-titled memoir “The Courage to Act.”  Incidentally, the last time we’d heard much out of the guy was when the hard copy was released in late 2015.
With respect to the Fed’s balance sheet, Bernanke remarked that the Fed should cut it from $4.5 trillion to “something in the vicinity of $2.3 to $2.8 trillion.”  What exactly this would achieve Bernanke didn’t say.  As far as we can tell, a balance sheet of $2.8 trillion would still be about 300 percent higher than it was prior to the 2008 financial crisis.
Bernanke, by all measures, is an absolute lunatic.

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Simple Math of Bank Horse-Puckey

April 23, 2017

The Raw Deal
We stepped out on our front stoop Wednesday morning and paused to take it all in.  The sky was at its darkest hour just before dawn.  The air was crisp.  There was a soft coastal fog.  The faint light of several stars that likely burned out millennia ago danced just above the glow of the street lights.
After a brief moment, we locked the door behind us and got into our car.  Springtime southern California mornings are exquisitely pleasant.  The early morning drive to downtown Los Angeles, on the other hand, is exquisitely painful.
Nonetheless, we make the best of it like we make the best of a trip to the dentist – or a visit with our accountant.  If anything, it affords us the opportunity to do something most people rarely do.  In particular, it gives us time to think.  Before we knew it we’d reached our destination.  But not before uncovering half dozen unrectified incongruities.  The sorts of things that are futile to piece together.
One thing that stuck in our craw like a broken chicken bone is the raw deal main street depositors and lenders get from credit unions and commercial banks.  In short, the credit system is tilted against them.  The rules of the game favor the bankers.

And this is what they saw watching the sky from Mt.

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Hell To Pay

April 18, 2017

Behind the Curve
Economic nonsense comes a dime a dozen.  For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.”  She even told the University of Michigan’s Ford School of Public Policy so earlier this week.  Does she know what she’s talking about?

Somehow, this cartoon never gets old… – Click to enlarge
If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does.  The unemployment rate is at 4.5 percent, which is considered full employment.  What’s more, inflation is ‘reasonably close’ to the Fed’s 2-percent inflation target.  But what does this mean, really?
According to Fed Chair Yellen, it means that now’s the time to tighten up the nation’s monetary policy.
By now you’ve likely seen this upcoming – choice – quote from Yellen.  Nonetheless, we can’t resist repeating its remarkable idiocy.  For Yellen, who was in the greater Detroit metropolitan area, was kind enough to humor us all with a nifty automotive analogy to explain how to go about normalizing monetary policy.

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March to Default

March 25, 2017

Style Over Substance
“May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”

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Well, Maxine Waters is obviously right – impeaching the president is an urgent task of the utmost importance. As everybody knows, he is best friends with Vladimir Putin, the shirtless barbarian who rules the Evil Russian Empire (they were seen drinking kompromat together in Moscow, a vile Russian liquor that reportedly tastes a bit like urine. Senator McCain has the details on that story). And as Maxine Waters has just disclosed, Putin’s armies are recently advancing into Korea! We cannot let this stand, or he’ll invade Kekistan next (note that he already controls Limpopo and Gabon). Who knows where it will end?

We assume this was directed at President Trump.  But what Waters meant by this was sufficiently vague.  There was no guidance as to how President Trump should be getting ready.

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The Long Run Economics of Debt Based Stimulus

March 18, 2017

Onward vs. Upward
Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.

What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only cleared her throat (if quite audibly, in 2008) and hasn’t really sung yet, it is already clear that calling this system careening toward a catastrophic failure. – Click to enlarge
Here is the United States, since the turn of the new millennium (starting January 1, 2001) real GDP has increased from roughly $10.5 trillion to $18.6 trillion, or 77 percent.  Over this same time government debt has spiked nearly 250 percent from about $5.7 trillion to $19.9 trillion.  Obviously, some sort of reckoning’s in order to bring the books back into balance.
Throughout this extended episode of economic and financial discontinuity, the government’s solution to jump-starting the economy has been to borrow money and spend it.  Thus far, these efforts have succeeded in digging a massive hole that the economy will somehow have to climb out of.

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When Trumponomics Meets Abenomics

February 11, 2017

Thirty Year Retread
What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]
Indeed, these topics are unlikely. Rather, what they’ll be discussing is cooperative trade, growth, and employment policies between their respective national economies. They’ll also talk about currency debasement opportunities.
Soon enough, perhaps by the time you read this, you’ll be able to peruse the headlines and garner soundbites of their discussions. Maybe a new partnership will be announced. Anything’s possible.
Regardless, what follows is a brief review – a thirty year retread – that’s intended to put the meeting within its proper context. This is the back story you won’t hear anywhere else…
To begin, it was precisely the wrong thing to do at precisely the wrong time. But that didn’t stop the best and the brightest from attempting to improve upon the natural order of things.

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Don’t Blame Trump When the World Ends

February 4, 2017

Alien Economics
There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.
One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes’ nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ – in fact, similar to Marx’ Das Kapital, it has done permanent damage. We have to admit that we have read it ourselves (and what a slog it was!) – contrary to Keynes himself, who once published a scathing critique of Mises’ Theory of Money and Credit without reading even one word of it, we prefer to actually read what those we criticize have published. In the first German edition of the book, Keynes freely admitted that his policy recommendations were probably more useful for a totalitarian State than a free society (i.e., it would be easier to implement them, because of their coercive nature). The biggest problem is though that most of the book is a rehash of hoary inflationist ideas that were already long refuted by the time of its publication.

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Adventures in Currency Debasement

January 30, 2017

Rekindling the Dollar Debasement Strategy
The U.S. dollar, as measured by the dollar index, has generally gone up since mid-2014. The dollar index goes up when the U.S. dollar gains strength (value) against a basket of currencies, including the euro, yen, pound, and several others. Conversely, the dollar index goes down when the U.S. dollar loses value.
Between July 30, 2014 and December 28, 2016, the dollar’s value, as measured by the dollar index, increased from 79.78 to 103.30 – or 29 percent. Since then, the dollar index has dropped to about 100. In addition, President Trump has said that the dollar is “too strong” and Treasury Secretary Steven Mnuchin has called the dollar “excessively strong.”
President Trump wants a weaker dollar to help with his program of bringing manufacturing jobs back to the U.S. The rationale is simple enough. A weaker dollar should make U.S. exports more attractive on international markets. Similarly, a weaker dollar should make foreign imports more expensive for U.S. consumers so they’ll buy products Made in USA.
Unfortunately, the unintended consequences of currency debasement – such as price inflation, currency wars, moral decay and others – are more destructive to a nation’s wealth than any trade advantage that can be garnered.

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With Trump Optimism of Small Business Soars

January 28, 2017

Pledges for Trump
“You boys know what makes this bird go up?  Funding makes this bird go up.  That’s right.  No bucks, no Buck Rogers.”
– Gordon Cooper and Gus Grissom, The Right Stuff (film)

Things are looking up for the United States economy in 2017.  You can just feel it.  Something great is about to happen.

Sam Sheppard in “The Right Stuff” – a 1983 docudrama about the Mercury 7 program and “the seats-of-the-pants approach of the people involved in the space program” (according to IMDB).

Photo credit: Ladd Company – Click to enlarge
Earlier this week, for example, after meeting with the incoming President, Bayer and Monsanto announced they will spend at least half of their agriculture research and development budget – approximately $8 billion – in the U.S. over the next six years.  It’s estimated the combined efforts of these two companies will add 3,000 new U.S. high-tech jobs.
Wal-Mart and General Motors also made job and investment pledges for Trump.  Wal-Mart said they’ll add 10,000 jobs this year.  General Motors announced $1 billion in investment, which would generate 1,500 U.S. jobs. Following these pledges, Trump tweeted:
“Thank you to General Motors and Walmart for starting the big jobs push back into the U.S.

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Trump’s Plan to Close the Trade Deficit with China

January 14, 2017

Rags to Riches
Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.
The search results had such a profound impact on Ma that he returned home to China and immediately started his first internet business.  After several tries he hit it big with Alibaba.  So much so that he’s accumulated a net worth of $27.1 billion USD – over 7.3 times more than President-elect Trump.  Not a bad rags to riches story for a poor Chinese school teacher.
Indeed, Ma takes a shrewd, yet casual, approach to business.  Back in 2014, he got a little sozzled up and bought China’s most popular soccer team from fellow Chinese billionaire Hui Ka Yan.  All in all, the soccer team purchase only cost Ma $192 million. As Yan recounted  of how the deal with Ma went down:
“By accident I got him drunk.  I told him my Evergrande soccer team is planning to issue shares and raise money to support strategic development, will you join?  He said I will. We finished it in 15 minutes.”
One of the great marvels of life is the direction in which money flows.

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Global Recession and Other Visions for 2017

January 2, 2017

Conjuring Up Visions
Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?
Here we begin by closing our eyes and slowing our breath.  We let our mind role back into the gray matter of our brain.  We wait patiently for new neurological connections to open up.  Then, ever so subtly, visions of the year ahead come into focus.
Will stocks go up or down?  What about gold and Treasury bonds?  Will the economy expand or contract?  Are we fated for World War III?  Who will win the Super Bowl? These are the questions – and more – we intend to answer.
Obviously, conjuring up visions is more art than science.  But so is Fed monetary policy. Nonetheless, before we get to it we must first lean upon ancient Chinese Philosopher Lao Tzu for a full disclaimer:
“Those who have knowledge, don’t predict.  Those who predict, don’t have knowledge.”
Hence, what follows comes from a place of zero knowledge.  We know nothing.  Still we sharpen our pencils and face our limitations.

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Why the Fed Destroyed the Market Economy

January 1, 2017

What Have You Done for Me Lately?
Swing voters are a fickle bunch.  One election they vote Democrat.  The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon.

Swing VotersSwing Voters – Click to enlarge

Humphrey-Hawkins Act: Fed’s Dual Mandate
The Humphrey-Hawkins Act of 1978 expanded the Fed’s job, charging it with maintaining full employment, too. The Fed shouldered this new responsibility with the lusty enthusThey don’t give a rip about questions of small government or big government.  Nor do they have any druthers about the welfare or warfare state.
In effect, they really don’t care.  What’s important to the swing voter is much simpler.  In fact, it can be boiled down to the following essential question.  What have you done for me lately?
The answer to this question, of course, comes back to money.  As far as the swing voter’s concerned, if their brokerage account’s growing they vote the incumbent party.  If it’s shrinking, they vote the challenger party.
It doesn’t matter if the source of the stock market inflation is a fraud.  Nor does it matter that a stock market correction will help reestablish financial markets on a firmer foundation.

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Wreck the Halls

December 30, 2016

Arrested Development
Despite the best efforts of the bulls to make history happen, they’ve been unable to ‘git-r-done.’  At the time of this writing, the Dow is facing another bout of arrested development; it has yet to notch 20,000 for the very first time.
What a feat it will be when this remarkable, but trivial, event comes to pass.  After a near eight year run, the Dow will likely eclipse this exquisitely round numeric threshold in the very near future.  Shouldn’t such an achievement – and the associated wealth effect – have made us all rich?
Apparently not.  For on the other side of the ledger a distinct, yet somehow related milestone is imminently approaching.  The U.S. National Debt is at $19.9 trillion.  Soon it will surpass a round and rotund $20 trillion.
The reality, however, is that the national debt exceeded $20 trillion a long time ago.  In fact, it’s really over 600 percent higher.  Remember, unfunded liabilities, including Social Security and Medicare, currently total over $104.5 trillion.
Added together the national debt and current unfunded liabilities total $124.4 trillion.  Verily, this number is so large it’s nigh impossible to comprehend.  Thus, for simplicity and for the sake of numerological harmony, today’s reflections are limited in breadth and scope to Dow 20,000 and U.S.

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Has the Fed Turned “Hawkish?”

December 18, 2016

Juiced
Stimulus, in a general sense, is something that causes an action or response.  A ringing alarm clock may prompt someone to exit their slumber.  Or a fist to the gut may force someone to gasp for breath.
Stimulus can come in many forms and varieties.  It can come in the form of a stick; do this and you won’t get whacked over the head.  So, too, it can come in the form of a carrot; do that and you’ll get a reward.

A classic case of gut-punch stimulus application. Now, all you have to do is imagine that the big person being stimulated is the economy. What should be your next question? Right! Will it achieve escape velocity? – Click to enlarge
Other forms of stimulus can produce a short, burst like, reaction. The caffeine in a cup of coffee, for instance, will temporarily reduce drowsiness.  Yet once the caffeine wears off, more coffee is needed to sustain the effect.
Former professional baseball player, and all around dirt bag, Jose Canseco knows a thing or two about stimulus.  Not from what someone has taught him.  But from what he learned through real world experience.  He literally wrote the book on it.

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Smart Programs of Capital Destruction

December 12, 2016

Too Smart to Think
These days everything must be smart.  There are smart cities, smart grids, smart policies, smart TVs, smart cars, smart phones, smart watches, smart shoes, and smart glasses.  There’s even something called smart underwear.
Before long everything around us will be so smart we’ll no longer have to do one critically important thing.  We’ll no longer have to think; smart algorithms will think for us.  What’s more, the possibilities for not thinking are seemingly limitless.
Just this week, for instance, in an effort to sound smart, Chicago Fed President Charles Evans indirectly advised President elect Donald Trump that fiscal policy must be “smart.”  Presumably, what Evans means by this is that fiscal policy must not be “stoopid.”

Modern-day wedgie-proof thinking drawers. How was life even possible before them? An area of the body not usually known for its thinking prowess is suddenly smarting up! – Click to enlarge
Fortunately, New York Fed President William Dudley clarified how smart fiscal policy would work.  According to Dudley, smart fiscal policy would include spending programs that are automatically triggered by a recession.  Specifically, Dudley said
“Extensions of unemployment compensation and cuts in payroll taxes could be triggered by a downturn.

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Smart Programs of Capital Destruction

December 12, 2016

Too Smart to Think
These days everything must be smart.  There are smart cities, smart grids, smart policies, smart TVs, smart cars, smart phones, smart watches, smart shoes, and smart glasses.  There’s even something called smart underwear.
Before long everything around us will be so smart we’ll no longer have to do one critically important thing.  We’ll no longer have to think; smart algorithms will think for us.  What’s more, the possibilities for not thinking are seemingly limitless.
Just this week, for instance, in an effort to sound smart, Chicago Fed President Charles Evans indirectly advised President elect Donald Trump that fiscal policy must be “smart.”  Presumably, what Evans means by this is that fiscal policy must not be “stoopid.”

Modern-day wedgie-proof thinking drawers. How was life even possible before them? An area of the body not usually known for its thinking prowess is suddenly smarting up! – Click to enlarge
Fortunately, New York Fed President William Dudley clarified how smart fiscal policy would work.  According to Dudley, smart fiscal policy would include spending programs that are automatically triggered by a recession.  Specifically, Dudley said
“Extensions of unemployment compensation and cuts in payroll taxes could be triggered by a downturn.

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Attaining Self-Destruct Velocity

December 3, 2016

Bad Monday
Some Monday mornings are better than others.  Others are worse than some.  For one Amazon employee, this past Monday morning was particularly bad.
No doubt, the poor fellow would have been better off he’d called in sick to work.  Such a simple decision would have saved him from extreme agony.  But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness.
From what we gather, upon arrival, he blasted out an email to hundreds of coworkers, including Chief Executive Officer Jeff Bezos, outlining several reservations he had with the terms of his “Performance Improvement Plan”.
After that, he executed a flawless swan dive off Amazon’s 12-story Apollo building, presumably to his death. Yet, somehow, he didn’t die.  He lived.  What now?
Quite frankly, we don’t quite know what this has to do with the economy by and large.  But we have an inkling there may be some relevance.  Perhaps it has something to do with an economy that is approaching self-destruct velocity, where every action has a far more negative reaction.

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Celebrating this Land of Absurdity

November 26, 2016

Myths and Legends
“Myths and legends die hard in America,” remarked Hunter S. Thompson in The Great Shark Hunt, nearly 40-years ago.
Uncompromising independence, rugged individualism, and unbounded personal freedom were once ideals essential to the American character. According to popular American folklore, they still are. We have some reservations.
In practice, the principles that gave rise to the great myths and legends of America died long ago. Freedom. Liberty. Independence. Limited representative government. Sound money. Private property rights. A humble and esteemable populace. Avoidance of foreign entanglements. Rafting down the Mississippi River.

Money Sucking Vortex
These concepts, in reality, faded away from daily life over the last century like stars in the morning. Over the last 100 years Washington has become a sort of money sucking vortex. At the Capitol Building sits a cadre of legislatures and an army of staffers working up new laws to take your money.
New rules, proposed rules, and notices are published daily in the Federal Register. A quick read of the daily publication – presently about 80,000 pages – will enlighten and alarm you to the vast array of agencies, departments, and commissions and their vast array of daily nonsense.

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Putting an End to the Regulatory Industry

November 22, 2016

Gross Regulatory Overburden
Corporate life in America these days is fraught with tedium.  First the MBAs imposed their silly six sigma processes and reduced workers to mere widgets. Then the regulators went through and squashed out any fun that remained.
Gone are the days when shrewd eccentrics could get rich using techno-babble to hawk the Turbo Encabulator.  Alas, there are rules and regulations stymieing all creativity.  In fact, as a matter of law, such restrictions are shoved in the workers’ face each morning as they fill up their morning cup of coffee.

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Bud Haggert presents the ground-breaking Turbo Encabulator! This thing has practically everything. Unilateral phase detractors! Automatically synchronized cardinal grammeters! Need farescent skor motion? No problem! Now you can finally do it in conjunction with a drawn reciprocation dingle arm to reduce soinasodial repleneration!

By our rough calculation the break room metric currently indicates an economy that’s grossly overburdened by regulation.  The break room metric, if you’ve never heard of it, is the ratio of wall space in office break rooms that is utilized by mandatory federal and state regulatory postings.  Anything above 10 percent utilization represents gross regulatory overburden.

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The One Thing that Will Change Everything

November 6, 2016

Ticking Time Bomb
“There are more things in heaven and Earth, Horatio, than are dreamt of in your philosophy.”
– William Shakespeare, Hamlet

The American populace counts down to Election Day with impatient intent. Will their party man occupy the White House come January 21, 2017? Or will their party woman occupy a federal prison cell?
These are questions that only the good wisdom of time can answer. Here at the Economic Prism we watch with indifferent curiosity. We don’t think either candidate’s worthy of high office. But we’re eager to know the election outcome, nevertheless.
The real noteworthy thing taking place today, that will have a real impact on your life, has nothing to do with who will be the next President. That’s merely a diversion. Rather, the real noteworthy thing taking place today – at this very moment – has everything to do with the ticking time bomb beneath the U.S. and world economy.

Don “Groper” Trump and Hillary “Private Position” Lincoln. – Click to enlarge
Indeed, we are talking about interest rates. If you haven’t noticed, they have been going up as of late. In fact, they have been going up quite a bit.
On Tuesday, the yield on the 10-Year Treasury note notched 1.88 percent. No doubt, from a historical perspective, this is extraordinarily low.

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Shrewd Financial Analysis in the Year 2016

September 4, 2016

[unable to retrieve full-text content]“Markets make opinions,” says the old Wall Street adage. Perhaps what this means is that when stocks are going up, many consider the economy to be going great. Conversely, when stocks tank it must be because the economic sky is falling.

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Yarns, Mysteries, and the CPI

August 22, 2016

No CPI Change
Several ill-defined economic data points were unveiled this week.  Namely, the Labor Department’s July consumer price index report.  According to the government data, on whole, consumer prices for the month didn’t change one iota.
Reportedly, energy prices went down, food prices were unchanged, and all other items slightly increased.  So when the official number crunchers tallied them all up, the subtractions washed out with the additions.  Thus, the reported CPI came in at exactly 0.0 percent.
This number is strictly scientific, of course.  Independent teams of research grunts could easily replicate it with precision.  No guess work.  No fudge factors.  All seasonal adjustments and hedonic regression estimates would align with complete accuracy.

CPI change rate – clearly, there’s not enough money printing just yet… – click to enlarge.
All kidding aside, what does a CPI reading of 0.

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The Great Stock Market Swindle

August 15, 2016

Short Circuited Feedback Loops
Finding and filling gaps in the market is one avenue for entrepreneurial success.  Obviously, the first to tap into an unmet consumer demand can unlock massive profits.  But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven.
Unfortunately, finding and filling gaps in the market is much easier said than done.  Even the most successful serial entrepreneurs fail more often than they succeed.  What’s more, success in one endeavor doesn’t guarantee success in another.
Anyone who has ever developed and marketed a new product from concept through sale knows how difficult it is to achieve profitability.  For every good idea there must be a hundred bad ones.  Yet the only way to really know the difference between a profit generating idea and a cash hemorrhaging fiasco is through trial and error.
Success and failure provide real feedback.  They deliver information – at a profit or loss – to businessmen and investors.  What’s working?  What isn’t?  What adjustments can be made to help eke out a profit?  These are the types of information that only the market can provide.

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Visions of Tomorrow from the Permanently High Plateau

August 1, 2016

Mad as a Hatter
Somewhere, someone first said “bull markets don’t die of old age.”  We suppose this throwaway phrase was first uttered in a time and place much like today.  That is, in the midst of a protracted bull market where stock prices had detached from the assets and earnings of companies their shares represent claim to.

They may not die of old age… but they do occasionally die. Photo credit: Brett Cole
Presumably, it was used as rationale for why stock prices should go higher.  Quite frankly, we don’t know why anyone would ever say such baloney.  But it likely makes the person who emits it feel content about their place in the world and their brilliant wit and wisdom.
No doubt, the current old age bull market has gone mad as a hatter.  Who in their right mind would invest their hard earned savings into a business for the opportunity to receive $1 of current earnings for every $26 invested?  Aside from Swiss or Japanese bonds, or lottery tickets, we can’t think of an investment with shoddier long-term prospects.  Can you?

Hatter time! Shortly before they die, bull markets tend to transform into something like this… Illustration by fearofthedarko.deviantart.com
Yet, based on the current cyclically adjusted PE ratio of roughly 26, this is exactly what S&P 500 investors are signing up for.

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More Signs the End is Nigh

July 22, 2016

Hyperventilating Minds
“What has been will be again, what has been done will be done again; there is nothing new under the sun,” explained Solomon in Ecclesiastes, nearly 3,000 years ago.
Perhaps the advent of negative yielding debt would have been cause for Solomon to reconsider his axiom.  We can only speculate on what his motive would be.  As far as our studies have shown, negative interest rates are a brave new phenomenon.
Still, we’ll concede the present day isn’t all that unique or special.  We continue to look to the night sky with wonder.  When the moon is full we let out a howl with the innate impulse of early man.  So, too, we still put on our pantaloons one leg at a time.

King Solomon, who reportedly was the go-to guy in his time when good advice was urgently needed. He also was a nigh inexhaustible fount of highly quotable statements. What would he have made of negative yields to maturity? Painting by Giambattista Tiepolo
The context, however, and the fantasies, have their differences.  Here we defer to Fred Sheehan, and a brief passage from his December 2006 historical essay, War of the Nerds, for edification from the not too distant past:
“Every generation suffers its particular fantasies.  So it was a century ago.

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Bank of Japan: Destination Mars

July 18, 2016

Asset Price Levitation
One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.
For example, in Japan this explicit intervention into the stock market is being performed with the composed tedium of a dairy farmer milking his cows.  The activity is more art than science.  Similarly, if you stop – even for a day – pain swells in certain sensitive areas.

The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit: Stringer / Xinhua Press / Corbis
In late April, a Bloomberg study found that the Bank of Japan (BOJ), through its purchases of ETFs, had become a top 10 shareholder in about 90 percent of companies that comprise the Nikkei 225.
At the time, based on “estimates gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan,” Bloomberg assumed the BOJ was buying about 3 trillion yen ($27.2 billion) of ETFs every year.

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Larry Summers Wants to Give You a Free Lunch

July 10, 2016

Consequences of Central Bank Policies
The existing capital stock continues to be frittered away at the expense of savers and retirees.  Nonetheless, central bankers don’t give a doggone about it.  This, after all, is one consequence of roughly eight years of near zero interest rate policy.

Central planning superheros, leaving a wasteland behind… Image credit: Steve Epting

30 year bond yield
Another related consequence is that the pricing equilibrium of capital markets has broken down.  In particular, bond yields no longer reflect a market determined price of money established by the economy’s demand for credit.  Hence, previously unfathomable interest rate movements are now happening with unwavering regularity.
Presently, the yield on the 10-Year U.S. Treasury note is sliding into the abyss.  On Wednesday a new record low yield of 1.34 percent was reached.  This is the lowest historical yield we could find based on a review of 10-Year Treasury rate data going back to about 1870.
The last time the interest rate cycle bottomed out was during the early 1940s.  The low inflection point at that time was somewhere around 2 percent.  Where and when rates will finally turn this time is anyone’s guess.

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Quitting the Cucumber Affair

June 27, 2016

Winners and Quitters
Vince Lombardi, the famous American football coach, once said, “Winners never quit and quitters never win.”  Maybe he meant that winners overcome obstacles to reach their goals while quitters give up and fall short… or something to that effect.
Certainly, this makes for a good bumper sticker.  Perhaps it’s a helpful quote for the first time marathon runner to repeat come mile 20.  Saying it aloud may somehow will them across the finish line.
But what about those who never quit, yet still never win?  By default does that make them losers?  Or are they just stubborn pack mules? And what about those who never quit despite not knowing what it is they are after to start with?  What does that make them?  Are they lost, confused, or something else?
We suspect there’s no one right answer to these questions.  They are a matter of opinion.  Each individual’s response will be influenced by their own experiences and preferences.  Regardless, this is merely the preface to today’s ruminations.

Legendary coach Vince Lombardi, prolific provider of bumper sticker material. Photo credit: USATSI

“Brits Don’t Quit”
This week, in the run-up to the Brexit vote, Prime Minister David Cameron reduced the matter of Britain’s national autonomy to a brainless bumper sticker.  “Brits don’t quit,” he said.

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Down Go the Hopes and Dreams of Three Generations

June 19, 2016

Summary
On Wednesday, Janet Yellen pressed on the broken buttons again.  After the two day FOMC meeting, the Fed Chair announced they’d continue pressing the federal funds rate down to just a ¼ to ½ percent – effectively zero.  What type of insanity is this?
If she keeps it up, and whole thing doesn’t implode, the yield on the 10-Year Treasury note could also slip below zero…along with the hopes and dreams of three generations of retirees.

A Sucker’s Deal
The yield on the 10-Year Treasury note’s accelerating its descent toward zero.  The last we checked the yield was at about 1.56 percent.  But in every practical sense, for income investors, a yield of 1.56 percent may as well be zero.
For example, at that rate, if you gave the government $1,000, you’d earn $156 over the next 10 years.  That comes out to just $15.60 per year.  As far as we can tell, that’s a sucker’s deal.
What’s more, it’s likely inflation will significantly erode the buying power of the initial principal.  Using the government’s own highly understated inflation calculator and looking back ten years, we find that $1,000 today has the buying power that $842 did in 2006.  Thus a nominal return of $156, when added to the eroded principal of $842, amounts to an inflation adjusted loss of $2 bucks.

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A Darwin Award for Capital Allocation

June 10, 2016

Beyond Human Capacity
Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.
Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and number crunchers they are incapable of stitching together an exact understanding of where the economy is really at, let alone where it is going.
What’s more, the economy is always evolving and changing in ways that are hard to discern in advance.  Cause and effect do not correlate with the simple precision of a balance scale.  When one input decreases, an apparently correlated one can somehow increase.
For example, when incomes go down, apartment rents should also go down.  Lower incomes should result in lower price competition for apartment rents and, thus, lower rents.  Logic would support the inherent truth of this premise.
Yet, in Sacramento California, and many other places, the exact opposite has happened.  Median incomes have declined 13 percent, while median apartment rents have increased 13 percent.  How does that work?
Perhaps too burdensome development regulations have something to do with it.

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