After 3 years the CM bids farewell. Thank you to all those who agreed, disagreed and added to the discussion. Current commitments prevent me from continuing it. I close in the hope that it managed to challenge conventional thinking. It is not a matter of always being right but testing the assumptions of the herd.
If you ever followed The Far Side cartoons by Gary Larson, you might recall the one titled “Hopeful parents“. It depicted a child playing video games while the parents dreamt of all of the successful job opportunities that lay ahead for saving the princess. Goldman Sachs predicts that the prize money for e-sports (aka video game competitions) will be over $1.3bn out to 2022. Time to dust off the Nintendo Donkey Kong. Do they still make batteries for these?
While the Dow & S&P500 indices grind back higher thanks to the US Fed chickening out on a rate rise in because the economy can’t handle it, many people still overlook the fact that core US profitability has tracked sideways since 2012. 6 years of next to nada. Sure one can boost profits by adding back unrealistic “inventory adjustments” but the reality is plain and simple. If you search for inventory adjusted earnings they’re still marginally growing but there in lies the point. Real profits aren’t.
Record buybacks fueled by cheap debt is the cause for ‘flattered’ earnings. No growth in E just falls in S. EPS growth can look spectacular if you ignore 50% of US corporates have BBB credit ratings or worse.
The latest lexicon is “modern monetary theory” (MMT). The idea that the central banks just manipulate markets in perpetuity. Austerity is no longer needed. Central banks print money and extinguish debts the same way. Seriously why bother with taxation? The question is if it is meant to be a sure winner, why aren’t we all living in 5 bedroom mansions with a Mercedes Benz and a Porsche in the driveway? Why not a helicopter?
Logically if central banks can buy our way out of this debt ridden hellhole, why is growth so anemic? Why is European GDP being cut back? Why is German industrial production at its worst level since 2009? Why does Salvini want to jail the Italian central bankers? Why does the Yellow Vest movement in France carry on for its 15th consecutive week? If MMT works why would the EU care if the UK leaves with No Deal? MMT can solve everything for unelected bureaucrats in theory. Even £39bn can be printed
Last year the US Fed announced it had stopped reporting its balance sheet activity. In 2006 it stopped reporting M3 money supply. Curious timing when inside 2 years the world was flung into the worst recession since 1929. Transparency is now a danger for authorities.
The question boils down to one of basic sanity. All assets are priced relative to others. It’s why an identical house with a view in a nice neighborhood trades at a relatively higher price than one in a outer suburban back lot. The market attributes extra value even if the actual dwelling is a carbon copy. It is why currencies in banana republics trade by appointment and inflation remains astronomical. Investors don’t trust their ability to repay debts unless given extremely favorable terms. Market forces at work.
To put the shoe on the other foot, if all countries adopted MMT why bother buying bonds for retirement? The interest is merely backed by a printing press. Best consume 100% and save zero. The government has moved beyond moral hazard and hopes no one will notice
Take a look at Japan. It has $10 trillion in outstanding debt which is 2x its economy. The Bank of Japan owns 60% of that paper bought through a printing press. The market for JGBs is so manipulated that several Japanese mega banks have handed back their trading licenses because it has become worthless to be on that exchange. The BoJ thinks it can make whatever prices it chooses. The ultimate aim is to convert all of the outstanding debt into a zero coupon perpetual bond with a minor ‘administration’ fee in order to assign some value to it. To the layman, a zero coupon perpetual means you get no interest on the money you lend and the borrower is technically never required to pay the borrowed amount back. Such loans are made by parents to their children, not central banks to politicians (although one could be forgiven to think their behaviour is child like).
Yet the backdrop remains the same. Consumers are tapped out in many countries. Lulled by a low interest rates forever mentality, even minute rises to stem inflation (real is different to reported) hurt. My credit card company constantly sends emails to offer to transfer balances at 9% as opposed to the 20% they can charge if I don’t pay in full.
APRA recently relented on interest only mortgages after demanding it be tightened to prevent a housing bubble getting bigger. Now mortgage holders hope the RBA cuts rates to ease their pain.
Like most new fads, MMT can’t remove the ultimate dilemma that Milton Friedman told us half a century ago. Inflation is always and everywhere a monetary phenomenon. One can’t hope that putting money in the hands of everyone can be sustainable.
The one lesson that we should have learnt from GFC was that living at the expense of the future has rapidly diminishing returns. All we did was double down on that stupidity.
Do we think it normal that Sydney house prices trade at levels the Japanese property bubble did in the late 1980s? Do we realize that we hold as much mortgage debt than Japanese banks did for a population 5x our size? Do we think that our banks are adequately stress tested? When an economy like ours has avoided recession for a quarter century, it builds complacency.
MMT is nothing more than a figment of the imagination. It preys on the idea that we won’t notice if we can’t see it. Unfortunately behind the scenes, the real economy can’t sustain the distortions. The French make the best modern day example of a growing number of Main Streeters struggling to make ends meet.
Central banks monkeying around with MMT smacks of all the same hubris of the past. It is experimental at best and reckless at worst. Markets can be manipulated for as long as confidence can be sustained. Lose the market’s trust and all of a sudden no amount of modern day jargon can overcome what economists have known for millennia.
If you flood a global economy with cash at 5x the rate the economy can feasibly grow then it will ultimately require bigger and bigger hits to get the same bang before the jig is up. It’s a Ponzi scheme. Bernie Madoff got 120 years jail. Why not the central bankers?
So what is the best asset out there? Gold. It can’t be printed. It requires effort to discover it and dig it out of the ground. Of course the barbouros relic deserves to be consigned to the dustbin of history. If that were so Fort Knox might as well leave the gate open. The more it is hated only makes this contrarian investor want it more.
Alexandria Ocasio-Cortez’s 5 minute “if I was a bad guy” routine in the House Oversight & Reform Committee went viral. 19m views. Such is the love of selective editing by the media that the video seemed to completely absolve her of the ridiculous Green New Deal plan which incidentally was pulled from her own website. She looked totally on message. However…
…Sadly, the unedited follow up saw the IFS Chairman Bradley A. Smith correct the record of the misleading questioning of AOC. She’s only 29 and on the fast track of learning the ugly world of politics.
The Democrats, as CM has said before, are missing a huge opportunity. She is a media darling. Instead of dragging her inside the tent and weaponizing her huge and growing following (especially millennials) with the pre-rehearsed party platform, Pelosi snubbed her from the Climate Change Panel and dismissed AOC’s manifesto as a “Green Dream.” Talk about eating your own kind. Better to have AOC on the panel to keep a leash on her media circle.
The longer they allow AOC to go off uncocked without the safety on, there will become a point where she passes the point of no return. The Democrats will lose probably their best asset. The longer she stays isolated, the more damage she will end up doing to the core of the party.
The Democrats need to show a united face in 2020. When lead candidate Kamala Harris endorses AOC’s plan without reading it, it only looks like a case of friendly fire. Is that what voters want to see? Expediency?
AOC is causing ructions. If the 70yo+ old guard party elites within the Democratic Party continue to treat her like a dotty 29yo, they’ll turn the weapon of their own making on themselves. That’s great news if you’re Republican.
…CM looks forward to catching a train to Hawaii.
Alexandria Ocasio-Cortez also intends to get every fossil fueled powered car off the road in a decade. The US has 270 million registered vehicles, the overwhelming majority being petrol powered. The US sells 16-17mn cars a year (sadly slowing). Therefore in the US, 16 years would be required to achieve that target. That’s before taking into account auto maker EV capacity.
Global EV sales were 2.1mn last year. So her plan would take 128 years. That’s unfair as capacity would grow. Let’s assume auto makers could conceivably increase capacity by 2m every 2 years (plants take 2 years to build and those poor Congolese child slave laborers will be run off their feet digging for cobalt to go in the batteries) then conceivably 30mn.cumulative EV units could be built over 10 years. That’s 11% of her goal. Let’s not forget the fossil fuels required to power auto factories to satiate this plan not to mention the steel that goes into the bodies.
Global auto production is c.80mn units. That assumes that the world’s auto makers will snub the ROW to meet her demands.
Socialist mathematics is never quite up to the task. Is Ocasio-Cortez was a true patriot she’d demand GM, Ford & Tesla be the sole products that consumers are allowed to buy to support domestic jobs. They’ll need them because she’ll be causing the lay offs of a shed load of Boeing line workers if planes are banned.
When she finally gets into the Oval Office we should look forward to her catching Ground Force One from 1600 Pennsylvania Avenue Station to travel the country and tell Americans how much better things have become.
Israel hating is somewhat of a political sport, especially at the U.N. This is a short video of a wonderful story made a reality by a dynamo Israeli woman, Tanya Moses Oziel, whom I only got to know personally in June 2018.
While virtue signaling seems enough in the social media world, Tanya has shown how through sheer determination and relentless passion, a mixed team of Israeli Jews and Palestinian Arab youth with different languages, cultures and a game (AFL) they’d never heard of can unite as one. The Peace Team still plays a decade later.
Thee original video can be seen here.