Now I'm No Economist But, ...

[Caseynotes]

 ... I've been looking at this chart for a while now and find it fascinating, I'm reminded of the cunning "emergency temporary measures" dreamt up by central bankers over the course of the century to stimulate a flagging economy that then go on to become normal (not temporary) practice, for example the issuing of bonds (originally) to finance wars.

 



 

So, for new problems you need new 'emergency temporary measures', printing money and acquiring debt then using inflation to dissolve the debt is clearly not working so what now? I suspect the most likely candidate is QE (forever) with a countries central bank buying up the countries debt then just forgiving it, or, in a similar vein this snippet from an article of a few months ago. (link to full article below)

 



 

https://pfh007.com/2016/05/12/deflating-the-australian-deflation-pandemonium/

 

We all know economists were only invented to make weather forecasters look good but one wonders how long we can keep treading water, that period between mid 60's to early 80's on the Dow chart is a worry but the chart suggests always be prepared for a downturn but identifying bottoms is the better bet and never underestimate the devious cunning of the central banker.

 

 

[Mercury]

Yeah there was no mention that the 0.5% rate was supposed to be a temporary measure in Carney's conference, no question by a tame (or ill educated) media either.  Carney avoided actually saying "never" on ZIRP and NIRP so wouldn't put is past him to go there.  However with ECB and BoJ already there and getting no results how much longer than the experiment be allowed to continue?

 

I am not sure whether you are saying the craziness is set to continue ad infinitum of not  can you clarify?  Or are you just saying take advantage while you can but watch out for when the bottom falls out?

[Caseynotes]

Hi  yes I think the crazyness can continue ad infinitum so long as production levels can be re-established and grow post any downturn, it will just be with an additional set of financial instrument baggage. The chart suggests there is no top, just corrections after unrealistic growth periods and the indicies charts appear to be topping out hence the intro of new (emergency, temporary, experimental) financial instruments. Trading is said to be a zero sum game but that is not quite true as continued production increases the sum. The real economy is people continuing to work and produce, the statistics are smoke and mirrors.

 

Can Carney hold out against neg interest rates, he seems to be the last man standing. Looking forward to real UK data post Brexit instead of doom laden surveys, consumer spending picked up last month and manu production (m/m) data today 09:30. As for Yellen and the US, I suspect DX is waiting for the last FOMC meeting minutes released next week.

 

 

[Mercury]

There is a problem with that theory  , if I am understanding you correctly.  Production, in theory, can continue in a negative interest environment because economists tend to only look at the financing cost of stock.  In a world where sales are down and continuing to trend down and international trade is also reducing (i.e. production for export is not happening either) then inventories grow as companies keep the production taps on full.  There are some good short term reasons for doing this, principally taking advantage of low raw materials and labour costs and of course low financing costs.  However there are limits to this, as with all things.  Inventory costs to hold (not just in financing costs but actually storage, insurance, obsolesce, theft etc).  Even more of an issue is the impact on key financial ratios that may affect both banking covenants and investor confidence.

 

So in the end it all comes back to growth and growth comes from consumer spending (unless governments are going to embark on massive infrastructure programmes - well China already did that and are in trouble sooo).

 

If you look at history it is littered with examples of government and central banker hubris, this time it will not be different, in fact it will turn out to be one of the worst examples of central bank interference led financial disaster.  I only hope the stories of middle income housewives pulling the plug on safe deposit investments and going into the stock market in search of yield are just that, stories.  If not we may get another mis-selling scandal.

 

I firmly believe the only safe place to put your wealth is cash and gold, despite zero returns.  Just look at what happened to people invested in property funds post Brexit.  As someone from Zerohedge wrote recently, the issue is not whether you can get a return on your money but whether you can get your money returned...

[Caseynotes]

Ha, there is no problem with the theory production produces wealth though, as you say, there also needs to be consumers, but only Stalin's communists made a mess of that. As for the manipulation of the economy (usually for political purposes) therein may be a cause for the need for corrections in market valuations, a very routine occurrence as the 'this is the top' chart shows. 

 

UK data today, UK trade balance non-EU (June) +£4.16 bln vs minus £2.56 bln expected, so there are consumers out there.

Manu production (June) 0.1% vs minus 0.1% expected.

[Mercury]

But you are advocating the same thing as the central bankers then right?  "This time it's different"  "ZIRP is the new normal".  In an environment where the only thing sustaining asset prices, and therefore confidence in the economy, is central bank QE and ultra low or negative interest rates.  QE and ZIRP/NIRP were, as you say, put in place as emergence measures, initially after the credit crunch but they kept coming.  In Japan it is a failed experiment in trying to engineer themselves out of a depressionary economic cycle with no sign of improvement and no end in sight.  The problem is that an end is in sight.  At some point the consumers stop buying as confidence seeps away and then there is nothing the central bankers can do.  It has already started.  Retail sales are in a down trend and retail stocks are struggling as discounters grow share.  Inventories are rising as profits drop.  Companies go into hiring freeze and wage freeze programmes (that is happening too - new jobs are mostly contract these days) and then cost cutting (this has been happening in the FTSE for some time and is accelerating).  New debt issuance levels are low despite all time low rates.  now the housing market in the UK is tipping over...

 

In short is is all about confidence, as it always is, and confidence is easily dented these days.  Given where we are a belief in central bankers coming to the rescue ad infinitum is not a bet I'll be making.

[Caseynotes]

No I don't think "this time it's different", I think "this time it's the same". Stocks, housing and money would appear to be over valued and due a correction, the stock and housing markets are likely to go lower while that abstract construct called money will continue to be subjected to malicious contortions dreamt by increasingly devious economists. Perhaps we should never have started issuing bonds or left the gold standard but we are where we are. But everything wont crash to zero and as the 'this is the top' chart implies, every turn is a new opportunity.

[Mercury]

Ah ok, misunderstood you.  Crash to zero?  Probably not, that is the end of the world scenario.  Having said that I believe at some point it will begin to feel like the end of the world as we enter the depressionary cycle necessary to "fix" the Ponzi that the central bankers have created.  Your chart is based on history, which is fair because history does repeat itself as humanity refuses to learn the lessons of history (hence the "this time it's different" narrative).  If you believe in the chart you attached then look at what happened during the 1930s depression.  Do you honestly believe it could never happen again?

 

In the end at this point it doesn't much matter whether it is a correction, severe correction or an actual depression in that we have to wait for it to happen and then act accordingly from a trading point of view.  Of course it does matter in the real world where people will be losing their jobs and other associate unrest is likely to become manifest so a depression or hyper inflation result is clearly a bad thing.  I fear that we were locked into one of these outcomes once the central bankers did not allow the market to self correct in 2007/8.  I suspect that they will be vilified for that and they know it too so they are desperately trying to stave off that inevitability.

 

Personally I don't think we have long to wait for this to play out.

[Caseynotes]

"... the failure rate among Silicon Valley start ups is 90%...".  (Silicon Valley is ...) "The most prosperous region in the world".

 

Very interesting article on how failure relates to success, the role of economists and regulation, and how it applies to current economic climate. 

 

http://www.realclearmarkets.com/articles/2017/08/31/the_path_to_economic_growth_is_an_absence_of_economists_102842.html