News That's Fit To Punt - 05/Aug/2016

BOE Set Interest Rates At Lowest Rates Ever

We live in interesting times. If you see things that are once in a generation, then live long enough you might see it twice. There are people who presumably experienced the Great Depression firsthand, and are now experiencing the GFC audits aftermath. Yet, even they would never have witnessed the Bank of England settler interest rates this low.  That would be because it's the lowest 322 years.

The central bank's Monetary Policy Committee voted unanimously to lower its benchmark interest rate to 0.25 per cent, the lowest level in the bank's 322 years. The rate had been at 0.5 per cent since March 2009.

further this year, but he ruled out the possibility of negative interest rates. The committee's next meeting is set for November.

The bank also said that it would introduce a series of additional measures to support the economy, predicting that there would be little growth in the second half of this year and that economic growth would decline sharply next year compared with its earlier forecast for 2017.

What we're seeing, is the Bank of England moving to the point where it no longer has any means of adding stimulus to a moribund economy.  

The Bank of Japan has been doing this for over 20years. There's a whole generation of people in Japan who grew up under low interest rates and low inflation that they cannot imagine a world with 6%-8% interest rates and 5-9% inflation. You wouldn't be saying it too loud, but it appears the British economy has entered a similar twilight zone where no amount of interest rate cutting and stimulus spending can reflate the economy. 

It's a strange state of affairs, when you think about it. The central banks are virtually giving money away to banks so they can lend into capital investment. The place where most of the money ends up is in fixed assets, namely housing, and businesses just hoard cash instead. The consumer expects prices to drop in the future so they too hold on to cash; and together they form an environment where demand is low. The rest of the heartache and sorrow, about which you know, so I won't go into it today. I just thought it was worth noting that if you see an institution doing something it hasn't in 322years, you're seeing something very extraordinary; something they'll be talking about in a thousand years' time.

The question I want answered is how do we get to the other side of this malaise without wars and revolutions and killing each other? Because that's what usually happened in the past. 

About Those Jobs In America That Were Lost To Free Trade

I caught this during the week and it's an interesting little article because it shows we might be overstating the extent to which globalisation is eating up manufacturing jobs. If you go through to the Op Ed it is citing, you get this:

The number of manufacturing jobs in the United States has indeed been in a long decline since the late 1970s, but that disguises the true story of American manufacturing. Nostalgia for a bygone era blinds politicians and voters alike to the reality of a revitalized sector of the American economy that is thriving in a global market.

American factories and American workers are making a greater volume of stuff than ever — high-tech, high-value products that are competitive in markets around the world. In the last 20 years, which include enactment of the North American Free Trade Agreement and China’s entry into the World Trade Organization, real, inflation-adjusted U.S. manufacturing output has increased by almost 40%. Annual value added by U.S. factories has reached a record $2.4 trillion.

What has changed in recent decades is what our factories produce. Americans today make fewer shirts, shoes, toys and tables than we did 30 years ago. Instead, America’s 21stcentury manufacturing sector is dominated by petroleum refining, pharmaceuticals, plastics, fabricated metals, machinery, computers and other electronics, motor vehicles and other transportation equipment, and aircraft and aerospace equipment. 

We produce more manufacturing value with fewer employees than in years past because today’s workers are so much more productive. They are better educated, equipped with more sophisticated capital machinery and turn out more valuable products than their parents’ generation. And as a result they are better paid, with total manufacturing payrolls rising during the last decade even as the number of workers declined.

The article in a nutshell says it's technological progress that has eaten the jobs, not trade. I'd imagine that this is true in Australia as well. There are good trade deals and bad ones (like theTPP they keep trying to pass), but in most part the economy has had rational players when it comes to manufacturing goods. 

I've had a number of discussions with people about this very phenomenon. It has been argued by empirical economists in the past that technological development does not kill jobs, it more than creates more jobs. That when the car came about, the horse-drawn buggy makers went out of business but lots of people found employment making cars; and so when the Australian automotive industry closes, those people will inevitably find employment in areas of higher technology. It makes sense that this has happened, but it seems unlikely that re-training auto-manufacturing workers into high tech workers of unspecified industries is the same as retraining buggy makers into auto-manufacturing workers. 

Similarly, the past performance is no predictor of future performance, and so we cannot simply subscribe to the view that it will happen again because it happened before. The implication being derived out of the empirical numbers, seem to be technological progress is happening in such as way as to cut the rate at which future jobs are created. We're now on the incline where each new development will likely destroy more job than they create, which is a new phenomenon.

The Rudd Revenge Is Just Beginning

Here we go!

"What I don't respect is, having pursued this campaign for United Nations secretary-general for such a long period of time in abso­lute good faith, to then see that good faith dishonoured and trust broken,"Mr Rudd told The Australian.

Arguing he had no interest in pursuing a "quixotic venture", Mr Rudd claimed his continued campaign to be the next secretary-general was based on assurances and underlying assumptions of support from both the Prime Minister and Foreign Affairs Minister Julie Bishop.

For his part, Mr Turnbull has again insisted that he told his predecessor that it was a decision for cabinet and warned him in May that the chances of his nomination going ahead were not good.

Oh, I dunno what to say. This Parliament hasn't even sat yet and they've managed to make a problem out of a trifle.

View From the Couch - 17/Jul/2015

Greek Drama Day 2,190

I've been on holidays for a couple of days so I didn't catch much news. That was sort of the point of the holidays: to get away from it all, and that sort of included this business of blogging stuff.

Anyway... Greece seems to have gone into a political meltdown. First, the Syriza PM Tsipras negotiated for Greece a worse settlement that was on offer for Greece before the 'Greferendum'. somewhere around 30-40 MPs of his side refused to back the deal, but with cross-bench support, Tsipras shepherd the changes Greece had to make, through its Parliament. The only way to understand this turn of events is that Grexit - to the consternation of many - was simply too hard to do and Greece would have plunged into being like an African nation where nobody lends them money and nobody goes there because everything has been looted.

And believe me, everybody will be looting everything the moment Grexit happens and there's not enough of food or medical supplies or oil or cash. There won't be a police force because they won't be able to pay them; and schools will shutdown, infrastructure will shut down. How is the complete and utter capitulation better than that? At least the banks will open again.

You have to understand that the oligarchical rich Greeks who brought about the conditions of Greece to be in the Euro and so much in debt still have lots of money in those banks. All the MPs on the conservative side of politics have that problem - they need the banks to reopen even if only briefly so they can take whatever cash they can and get it out. I know it's a terrible thing to ascribe such a terrible motive to these lawmakers but these are extraordinary times. And let's not forget, conservative lawmakers in any land are the rich, if not the proxies for the rich. They will take any amount of financial pain to their fellow citizen as long as they can keep their rents going; something that's true even in Australia, but that's another story.

All this hollows out the 'Greferndum' as well as underscores why Yanis Varoufakis might have resigned at the point he did. It simply didn't matter what the Greek people - the demos! - wanted. There was no real negotiation, it was simply terms being dictated to Greece by the ECB, EU and to a lesser extent, the IMF. Leading the assault (so to speak) was Angela Merkel who on behalf of Germany essentially gave nothing and got everything. Unfortunately Tsipras now looks like an asshat clown instead of the modern day Themistocles; but all of this might be part of a greater strategy to better engineer a good Grexit rather than a bad one.

Angela Merkel and the northern alliance of countries, banksters and technocrats - the modern day barbaroi - have essentially cited the rule of law as the cornerstone from which they are making their demands and refusing to give any debt relief. Hidden in there somewhere is still the trillions of dollars worth of Greek Bond derivatives that would blow up on a Grexit, so getting this deal done without the haircuts is a great boon for them. It means Germany won't be plunged into the kind of chaos seen on the streets of Athens, and by extension it means the world markets won't be roiled in another GFC so soon after the last one.

Old World Problems

The European Union isn't looking too flash hot these days. Given the choice of kicking out Greece or keeping it and helping it as one of their own, they opted to keep Greece so they can keep kicking it which combines the worst aspect of both options. This does not look good to anybody. Since its inception in the early 90s, the European Union had argue its wide, pan-nationalistic cause against nationalist right wing nutjobs in each and every country. By approaching Greece the way it has for the last 5 years, they've opened up a front to the left as well as to the right, whereby Syriza and Podemos in Spain have now split off to the left of the EU andean demonstrate that the loss sovereignty in the EU project is a major problem for countries with great debt and great unemployment.

Inadvertently, the winningness of Germany on its own has redistributed its low-industrial high-unemployment problem to the PIIGS nations, where they don'thave the control to ameliorate the unemployment being exported out of Germany. All these countries in the advanced, old-world share the problem of not knowing where future growth is going to come from, and so interest rates have fallen to zero, just to keep the economy going and from asset prices from collapsing. In this light, it makes sense that banks become gamblers locked in a zero-sum game (low to no growth) and making money/saving money involves taking it from somebody else (hello Liberal Party of Australia).

The world is running out of growth because there are so few spaces in which to grow. We can chop down all the forests in Amazon and clear out the last remaining wildlife sanctuaries in Africa, but there is not enough space into which the globalised economy can grow. The emerging markets are a higher grower right now, only because they're starting from a lower base. Even their growth will run down, just as it has in China. It's what it means to have a developed economy.

In the absence of a physical frontier, there is only the cyber frontier until space opens up. This explains Google, Amazon, Apple, Microsoft and Facebook, and how Elon Musk is busily building up SpaceX. It should tell you something about where the smart money thinks things are at.

As for Europe, this dynamic is playing out in a new way. Europe will now cannibalise Greece to keep the rest afloat. But it also means the PIIGS are next in line to be cannibalised once Greece descends into the pit of depression. And if the same treatment descends upon the PIIGS, how soon will it become like 1930s Germany where Leftists and Fascists fight in the streets? Or there is a new civil war in Spain? Many of these conflicts now echo older ones, precisely because they're being fought over old settlements that are now being undone in the light of zero growth, ZIRP, and high unemployment. Economic settlements are only as good as the money spent to maintain them. When it becomes cheaper and expedient to let the people starve and fight it in the streets, we'll see some realpolitik and class warfare as a certainty.

RBA Cuts Rates to 2.00%

Historically Low Rates

Just as the scuttlebutt around the markets predicted, the RBA cut interest rates yet again. At 2%, it's never been this low in the time the Reserve Bank has existed. More over, they did so even with the threat of real estate prices in Sydney going even more ballistic. It's pretty much as the IMF suggested, and really hen you look at it, it's still quite high compared to the other countries running their ZIRP, especially if the Reserve Bank of Australia likes to move in 0.25% increments. We have 8 increments to zero, and 6 to the 0.5% being offered in the USA. It's enough to still encourage wary internationals to buy our bonds.

Of course, as I've discussed before, low interest forms a very difficult frame around what exactly we're seeing as our economic future. The collapse in interest rates in advanced countries has gone hand in hand with the collapse of the future horizon, where it's unclear where the next spurt of growth is going to come. The fevered investor activity in real estate happens exactly because the investors cannot see the future-industry-to-come beyond the mining boom, they're rushing to lock up their spoils in real estate in the hopes of squeezing rents for their cashflow.

Added to the fact that speculative activity increases as money supply becomes easier, and you have exactly the scenario where there's too much money chasing too few assets. There is inflation going on in the markets, but interestingly enough, we're being dragged towards ZIRP all of our own down under precisely because the RBA doesn't want to pop the bubble and create a stampede for the door.  The problem is, the RBA has to either wear a preternaturally high Australian Dollar, or wear a property bubble. It's already at the point where the RBA is finding it hard to raise interest rates, so the question that looms is just when are we going to get down to ZIRP? Because the rates really appear unlikely to go up any time soon. In fact going up would act like a margin call and suddenly all these happy home loans will become distressed. It would cause a shitstorm. Besides which, given the weight of globalised capital markets, the only way forward is no cuts or more cuts.

And what the hell is Sydney going to look like when interest rates hit even 1.00%, let alone a number starting with zero? It's going to be really wild.

What's really strange is that politicians of this land seem perfectly okay with all of this.

Quick Shots - 31/Dec/2014

Are We Headed To Zero Interest Rate Policy?

I wonder when Australia's RBA would be forced to run a ZIRP of its own. To date, the RBA has been trying to jawbone the AUD down and it has lost around 15% this year since its peak at US$0.95. That being said 70% of the money in the Australian equities comes from overseas, and you'd have to think that was in pursuit of yield. This is helping our blue-chip stocks keep very high valuations as they pay out their dividends, but it is also showing up as the property bubble. Simply put, the very quantity of foreign investment sloshing around in our markets is not reflective of how exactly our country is going.

Still, with commodity prices collapsing and national revenue dwindling, it's worth asking how exactly this government sees Australia in the years to come. One has the suspicion that perhaps there hasn't been much thought put in to this question by our current government, moreover this is not the kind government to consider these kinds of problems as problems. Just listen to Joe Hockey - he thinks growth would be a good thing to strive for, for the G20 nations. Who would'a thunk that?

Let's say for the moment that what we've been witnessing as the new reality, post GFC - where growth is anaemic and debt is crippling in the developed world - is indeed the way things will continue as a general economic setting, then it would seem Australia will inevitably have to cut rates to match the Zero Interest Rate regimen that is currently in place in the USA and Japan. With the recovery under way, the USA might raise interest rates in 2015, but this might be a kind of idle speculation in as mutes nobodies certain the recovery under way really is meaningful.

If the USA can't raise rates and Japan can't raise rates, and the Euro zone running extremely low rates, there's an argument to be made whether it is feasible for Australia to have interest rates that are significantly higher. The drop in the AUD means the international investors are pricing in the likely drop in interest rates to come. If the Australian economy keeps losing momentum, it won't be long before there will be a recession here before there is a rate rise over in the USA. Naturally the RBA will cut rates and we will be closer in line with ZIRP nations.

What nobody seems to have figured out is how to actually get out of ZIRP. As it is we're being sucked down the drain towards ZIRP. We maybe talking about a very different kind of economy in only a matter of years from now.

And now for some short movie crits...

'Expendables 3'

If the second one was getting long in the tooth, the third one is a bit like the current New York Yankees roster: filled with aged veterans who were great a long time ago, and a bunch of kids we know nothing about just yet. The ageing stars include Sly, Mel, Arnie, Harrison, Jet, Dolph, Terry, Wesley and Antonio. In their heyday a movie like this would have cost $200million above the line just to assemble the line up, but because they're all far from and on the wrong end of heir peak fame they can be picked for a song.

Mel as the bad guy is fun and gets the best lines and because he's the most proper actor amongst this bunch, he makes it look the most like he means his lines. Everybody else is just phoning in their  schtick. The Wesley Snipes quip about being in prison for Tax Evasion; Arnie's line about not really having retired; Harrison Ford's quip that Bruce Willis is "not in the picture" and so on makes the script like a parody of a parody of a parody. There's a lot of eye-ball rolling when you watch this film. I can't believe it was so long ago tat Jet Li kicked Mel's ass in 'Lethal Weapon IV'. This time it's Sylvester ... and Mel's stunt double has a good bit of Kung Fu left in him, but it's mostly pantomime-for-the-punters. Oh how the mighty have fallen. We grow old, we grow old, the universe indeed ends with a whimper.

They will probably make more of these. If they do I'll probably keep watching them. I really don't know why. I hope the new Terminator movie kicks ass next year.

'Chef'

Jon Favreau plays a chef who regains his self respect. It's the actors in the cameo roles that make this one amazing: Scarlet Johansson as the sommelier; Sophia Vergara as the ex-wife; Robert Downey Jr. as the ex-husband of the ex-wife; and Dustin Hoffman makes an appearance as the restauranteur. It's weird casting.
Seems to me, if you looked like Jon Favreau and your ex-wife was Sophia Vergara, you'd commit suicide because it is indeed the end of your life. You wouldn't be doing this stuff in this movie.

The film gets a pretty good rating on rotten tomatoes but it's hard to argue the film is anything more than feel good fluff.

'The Boiler Room'

A true blast from the past which I missed way back when. Maybe was good that I did.
I hadn't watched this when it first came out because it seemed a bit staid, but it's based on the story of one of the guys who worked for the Wolf of Wall Street, Jordan Belfort. Its shooting style and look have dated a bit but it's a great companion piece to 'The Wolf of Wall Street'. The stand out scene might be the scene where all the 'traders' (its hard to call people pushing penny-stocks 'traders' but yes) can recite the lines from 'Wall Street' as they watch it.

Because the film is couched as a morality tale the film is far less charming than the picaresque of 'The Wolf of Wall Street'. That being said, it has a certain angle of realism that sheds light on what kind of idiot went and worked for Jordan Belfort. Vin Diesel is also in this film, who is amongst other things, playing a guy with hair.

Ben Affleck is also in it as a kind guy like Alec Baldwin's sales boss in 'Glengarry Glen Ross'. During his big speech, his character of course promptly invokes Alec Baldwin and his character in 'Glenngary Glen Ross' which illustrates the very low artistic ambitions of this film.
"Do you know the bad guy from that film? I'm him!"
Yeah, we get it, we get it.

A Memorable G-20 Is Looming

To Hell In A Handbasket

Things in global markets are looking pretty crook. The first real signs of trouble that the markets are beginning to unravel around the world, are over in Europe where deflation fears are riding right over the rhetoric of the ECB saying they're willing to do anything - including their own version of QE3.

RBS estimates that the inflation rate has already dropped to below 0.1pc in the eurozone if one-off tax rises and fees are stripped out, and this measure may turn negative in October. “Deflation is already knocking on the door. We think it could happen as soon as next month given the latest fall in food prices,” said Mr Roberts.

“We are reaching the end game in Europe. If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate,” he said.

Ruben Segura-Cayuela, from Bank of America, said low inflation has become “the biggest threat to the dynamics of public debt” in the eurozone, warning that debt ratios risk “spiraling up” even at levels of around 0.5pc.

France’s debt will keep rising from 93pc to 102pc of GDP by 2016, even in the best of circumstances. It will reach 117pc under a “lowflation scenario”, and 120pc if there is no further fiscal tightening. Spain’s debt will hit 113pc under similar circumstances. “What worries us is that we are not even stress testing for deflation,” he said.

It's all going south because of the threat of deflation; deflation of course means the investor class have to take a rap in the economic cycle, and that is something all the central banks want to avoid. Though it has to be said after all through the years of QE 1 through 3, we've had a nagging feeling that the economy is fundamentally broken. If you have to print that much money to fill all the liquidity holes and keep things going, one has to start questioning if the whole global economy itself is actually viable. It might be that we've been pumping litres of blood through a corpse in the hope that it springs back to life.

They may (and will) talk about a lot of things to do with deflation at the coming G-20. You would have to wonder if they will be talking about the current unfolding market mayhem as a correction or the beginning of the end.

Interest Rates At Zero or Near-Zero Makes For Bad Decisions

When we Gen-Xers were kids, we used to have saving accounts, and these things would bear interest. You would be taught the benefits of saving by having these accounts, but more importantly the banks were legitimately interested in investing in some way as to return interest to investors. After the 1989 market rout, Alan Greenspan cut rates, and they never went back up to where they use to be. Through his tenure, Greenspan gave to the markets what is known as the 'Greenspan Put', and cut interest rates every time investors ran into trouble. In one sense, the economy never really recovered from 1989 because US Fed's interest rates have never been as high as they were then. Similarly, Australian interest rates have never been as high at the time it hit 17% just before Paul Keating's "recession we had to have". Since then Australian interest rates have fallen to historic lows and have been there for 15months-and-counitng.

The upshot of all this is that it absolutely punishes savers. It drives them to chase dividend yields and take risks they would not like to take. Investing gives way to speculation, and worse still, it makes it cheaper for people to borrow money to play the markets. Whatever you might say about the risk appetite, when interest rates reach close to zero, it opens the door for people to make really risky bets.  Just how risky? It's said that there are 7 trillion dollars worth of derivatives that could blow up if the US Fed were to raise their interest rates half a per cent. And if such moneys should go up in smoke, you can bet your bottom dollar that there will be a liquidity problem and markets would seize or crash or both seize and then crash.

It essentially means there is a sword of Damocles hanging over the US Federal Reserve to keep printing money and keep interest rates at zero. You can well imagine there's no such thing as 'prudential' in any of this. Worse still, it has effectively turned the market into one giant too-big-to-fail problem. And so we continue with the ZIRP (Zero-Interest-Rate-Policy) and Near-ZIRP around the world. It does make you wonder if the economy has flat-lined, if the only thing making the money markets go around is speculative bets made with borrowed money on near-zero interest. It seems completely non-sensical, but there you have it.

This article says we might even need QE indefinitely into the future. Ben Bernanke even said he would be surprised if QE ended during his lifetime. That's surprising on the surface, but not so surprising when you consider just how distorted markets have become.

There Is No Cavalry To The Rescue For Investors

The simple truth is, when you have America's Federal Reserve running Zero Interest Rate Policy AND Quantitative Easing (money-printing) for as long as it has, you sort of expect them to come to the rescue. That's been the moral hazard of printing money and giving it to Wall Street banks.

Except when the interest rate is at zero, and you've printed as much money as the Fed has, you have to say they've run out of bullets. So why are the markets jittering now? That would be because this is the month QE3 which started under Ben Bernanke's watch is going to finish its 'taper' under Janet Yellen. This is the end of the free punchbowl. The market jitters are a bit like an alcoholic's shaking hands when the grog supply is cut. It's amazing how the whole world's markets are jittering. That's a lot of investors who got drunk on the Fed's punch.

Anyway, with even the RBA in Australia at record lows in interest rates, there's really not much room for any of these Central Banks to move. I mean, what is the Bank of Japan going to do, when it's already doing 'Abenomics' and printing money like there's no tomorrow (...and maybe there isn't a tomorrow. Now there's a thought). And what has it done? Not enough to lift Japan out of its two decade long deflationary spiral. Maybe when the shit really hits the fan in Japan, they'll have jubilee and just cancel debts.

For the rest of us, we have a decades-long deflationary cycle looming up ahead. I wonder how they're going to address that at the G-20. Naah, they'll probably just throw Vlad and Tony in the ring to box and sell tickets.

Home Is Where The Bad Investment Decisions Live

It's like there's some chorus of bad news going on out there. Here's an interesting article about the property bubble in Australia.

No, blame high home prices on the global financial crisis five years ago. It gave us record low interest rates and a building slump even as the rate of population growth was increasing. 

So demand was fuelled by low interest rates and supply constrained by a lack of new building. 

If you believe the latest QBE annual Australian Housing Outlook, compiled by BIS Shrapnel, prices are going higher. 

I must admit each year it seems overly optimistic about property prices but that was so only once in the 13 years it's been published. Unfortunately that was a doozy because it got the direction wrong as well, and being in 2010 was just recent enough to survive my short-term memory. 

In Sydney, the market where the shortage of housing stock is the most chronic and investors are apparently running amok, it predicts prices will rise 9 per cent. Oops, that's over three years. In fact, the forecasts are for 7 per cent this financial year, slowing to 5 per cent the following year and then falling 3 per cent. 

Brisbane is the place to be. Its values are forecast to rise 17 per cent over three years with the Gold Coast not far behind with a projected 15 per cent.

That would be the standard explanation of how the current property bubble was allowed to remain in place by the RBA, back when the GFC began. This is the real trick. The RBA decided deflation was bad because it would hurt 'investors'. So they decided to run what amounted to a Price Keeping Operation for Australian property market by running a low interest rate policy. Naturally the real estate market and its rampant speculators stayed in the game - unpunished of their bad calls, rewarded with moral hazard removal. As a result, seven years later we have even more private debt, a lot of which is tied up in real estate, and the four major banks are even more Too-Big-To-Fail.

This is all very vexing because the real estate bubble is wreaking havoc on the rest of the economy. Australia is not alone with this problem. Canada, New Zealand and the UK all share this problem, and the property bubble in America certainly got a second wind in the last 24months. None of the  Central Banks have figured out a way of unwinding it without investors taking a real hit so they keep jawboning the future outlook of the property market down, but nobody seems to believe them; and they're right not to believe them because all these central banks are running ZIRP or near-ZIRP, the biggest enablers for the purposes of furthering speculative activity in property.

I do wonder if they'll be bringing up this problem at the G-20 as well.  This may well turn out to be the last G-20 meeting before the markets tank and global turmoil is unleashed in the markets again.