Dear Prudence

Canada’s Real Estate, a new China Syndrome and a System Getting Played?

“Dear Prudence is me. Written in India. A song about Mia Farrow’s sister, who seemed to go slightly barmy, meditating too long, and couldn’t come out of the little hut that we were livin’ in. They selected me and George to try and bring her out because she would trust us. If she’d been in the West, they would have put her away.”   – John Lennon

Prudence has seemed to go a bit barmy here in Canada as well, although I refer to the very real Canadian debt levels and Toronto/Vancouver real estate markets rather than someone on meditative leave.  During the great credit crisis, Canada’s conservative banking system was revered around world for its conservatism and relative stability. But fast forward to today, the takeaway from these pictures speak plainly.

Canadian real estate is running hot on global measures.


There is no precedent for this level of consumer leverage, leaving Canada highly sensitive to interest rate and or income shocks.  Tired economic cycle and job markets, please don’t fail now.


The hot markets are predominantly a Vancouver and Toronto regional issue, especially with energy markets taking Alberta’s economy down.   Although it isn’t as though slumping energy and mining markets haven’t reached BC.


Naturally its right to focus on central bank policy and their solutions to everything – easy money.  Today’s bubble economics, manipulating markets and forcing all asset prices and debt levels higher and higher, is proving simply to be an experiment of hope to somehow turn improbable math into economic favour.  Easy money has lifted house prices around the world.  Still, taking this monetary background as a universal given, there must be something more to the story that distinguishes Canada’s housing and debt journey from the rest of the world.

A new China Syndrome ?

‘China Syndrome’ was originally coined to describe the sequence of events following the meltdown of a nuclear reactor, in which the core melts through its containment structure and deep into the earth.  Are we in an era maybe aiming to apply new meaning to the phrase, this time to China’s possible inability to contain its own massive economic bubble?

Even in their world of crazy large numbers, never has the world seen the kind of borrowing and building as China has produced just since the credit crisis. Desperate to keep growth going,  since 2007 debt/gdp soared from 80% to over 300%, debt growing  fourfold or some $18Trn.  In a span of a few short years they’ve used more concrete than the US has in its entire history, more steel than the UK has in its history.   We’ve all heard about their empty cities but…they reportedly sit on some 11 Bln sq ft or 63mm vacant homes.  Debt to be repaid and empty spaces to fill, this is tremendous future growth that they’ve pulled forward and must now digest.  It’s easy to conclude it all unsustainable and vulnerable, but it is a planned and manipulated economy of unprecedented size, so it’s so difficult to game and time.  It’s no surprise they’ve put controls on capital wanting to leave the country.  The world would be right to be afraid of currency devaluation and some larger looming economic danger.

Screen Shot 2016-09-27 at 6.25.12 PM.png

But capital does get out, an estimated $1Trn over the last year.   There are plenty of stories of strong Chinese buying heating real estate markets elsewhere – Vancouver and Toronto included.  The motivations of one side, individuals de facto exporting bubbles, are very different then the other, countries understandably not wanting to import them.


Dear Prudence, won’t you come out to play?

Remember the systemic complicity of the US housing bubble, the failure at so many levels?  A Federal Reserve asleep at the easy money and oversight switch, even denying there was a problem when it had become obvious.  Wall St couldn’t leverage up and repackage garbage mortgage product and the banks couldn’t underwrite the feed fast enough.  The rating agencies minted money by bolstering securitization with blind endorsement.  Regulators were nowhere to be found.  Banking became all about quantity not quality.  Wall St bonuses boomed, suddenly mortgage brokers drove nicer cars than realtors and the appraiser owned a few homes ready for flip.   Everything to do with building, renovating, furnishing, financing, buying, selling was red-hot.  Joe Public had no chance, a system literally throwing money at him, demanding he borrow to buy and ignore the fine print.  The media swarmed with mortgage ads and stories of getting rich.  Politically, a home for everyone was fulfilling the American dream.

And within this ‘no-brainer’ confidence  came the nefarious –  liar loans, predatory terms and outright fraud.

Brought to its economic knees, eight years later the world still wears the shrapnel.  So, live and learn and never again, right?

Central banks are surely repeating their mistakes.  And China is reinventing the mistakes to scale.  In Canada it feels like some of the same mistakes of systemic complicity are playing out in Vancouver and maybe Toronto too.  Outside the real estate related economy, it’s not like the country is booming nor immune from debt headwinds and the global growth slump, especially to those exposed to commodities.

A reminder that Ontario has the world’s largest sub-sovereign debt at $307B, over twice that of California but with just a third of the population.  To the west,  ag, mining and energy markets have experienced downturns ranging  from severe to disastrous.  A consequential 25-30% drop in the $C over the last few years has helped stem some of the blow and helped manufacturing remain competitive and helped make real estate that much more attractive to foreigners. But still, these aren’t the economic roots of a healthy income-driven housing boom.

While unlike China, Canada doesn’t sit on millions of empty homes, like China, the levels of consumer debt dictate that the economy now needs to hope home prices remain relatively stable to avoid triggering real problems.  Given crisis history is so recent it is a wonder that the Bank of Canada and reputable banking system engendered such unstable consumer credit levels.

Look Around round round

Nonetheless the recent news stream suggests there are oversight cracks that can be addressed, even if it is a bit like closing the barn doors after the horses are gone.  While a passionate proponent of free markets, as a Canadian I see no reason why we should willfully and silently watch, if in fact foreign buying is resetting the domestic economics for Canadian tax paying homebuyers.  Maybe there should be a separate set of rules for non-citizens?

It’s 2016 and a time of heightened border concern everywhere, and elevated info-tech and data management abilities –  there should be no excuse for lack of oversight of any foreigner transacting in real estate;  from realtors and their local Board’s oversight, to FinTrac, legal contracting and titles, contract assignments, bank lending,  immigration, tracking numbered companies, Canada Revenue Agency (CRA) and differing Provincial standards.

Remember, nefarious dealings are symptomatic of bubble environments.  As once famously said, banks get robbed  “because that’s where the money is.”  The stories in the press of foreign money laundering or lack of CRA oversight on capital gain loopholes or banks offering different lending standards to foreigners with no income verification or foreign investment clubs funding flips;  these all scream out that Canada is a system getting played…because that’s where the money is.  When I read a foreign student in BC purchased a $7mm property and flipped it for $8mm , I have to wonder about the bubbly systemic complicity enabling it to happen.

It’s a struggle to make a list of solutions.  We are that far deep into the problem.

Vancouver’s new tax on foreign buyers is showing early impact.  But what if this just hurts Vancouver and means the business moves elsewhere, to Toronto or Calgary?  There are already reports of buying tours even redirecting to Seattle.  These buyers seem committed.

New Zealand, also dealing with hot markets, imposed a 40% down-payment requirement on investment properties.  Maybe Canada could similarly entertain a heightened downpayment requirement on foreigners?

Maybe the CRA should make the capital gains exemption for primary residence eligible for Canadian citizens only?

Hawaii has a significantly elevated property tax for out-of-state non-resident owners.  Something Canada could consider for foreign buyers?

Its great that Canada is such an attractive country that foreigners want to invest here and move here.  But it would be wise for Canada to get its immigration/real estate/banking/taxation paper trail act together.  We’d rather be sure Canada is attractive for its beauty and people and civility and prudence, not because it was easy to play.

With Canadian debt having run so high, there is growing vulnerability to macro developments.   Very recent global history should serve as reminder.  The Bank of Canada can’t run national policy to what is clearly extreme regional noise.  But they and the banks and the regulators need to identify the increasingly obvious cracks in the system and fill them.   Or risk remaining complicit.


Dear Prudence

Dear Prudence, won’t you come out to play?  Dear Prudence, greet the brand new day
The sun is up, the sky is blue  It’s beautiful and so are you
Dear Prudence, won’t you come out to play?

Dear Prudence, open up your eyes  Dear Prudence, see the sunny skies
The wind is low, the birds will sing  That you are part of everything
Dear Prudence, won’t you open up your eyes?

Look around round  Look around round round  Look around

Dear Prudence, let me see you smile  Dear Prudence, like a little child
The clouds will be a daisy chain  So let me see you smile again
Dear Prudence, won’t you let me see you smile?

Dear Prudence, won’t you come out to play?  Dear Prudence, greet the brand new day
The sun is up, the sky is blue  It’s beautiful and so are you
Dear Prudence, won’t you come out to play?



Golden Slumbers, Carry That Weight


Golden Slumbers is based on 16th century poem and part of a string of medleys on side 2 of the iconic Abbey Road album.  Legend has it McCartney saw the poem in a piano book, couldn’t read music but liked the words and recreated it with his own tune.

Carry That Weight apparently was referencing the trouble the band was having, amongst themselves and with their label.


Golden Slumbers, Carry That Weight

Once there was a way, to get back homeward…

Obviously gold was money and once backed world currencies. Because central banks still hold it and accept it, some even still buying it as a reserve, it technically still is a currency. It represents no one country and unlike paper money it has no pledged faith and credit against it. It’s no one’s liability.

Still, seems it comes and goes in popularity, its history of appeal during crisis labeling it a form of insurance. Is that why long term fans perpetually seeing danger around the corner are labeled gold bugs?

Despite its storied history as money, when it slumbers, pundits are quick to mock its appeal. It’s a barbarous relic, a pet rock of the gullibly paranoid. It’s an investment that yields nothing.

“I would characterize gold not so much as a hedge against monetary disorder, but as an investment in it.”

“The price of gold is the reciprocal of the world’s faith in central banks.”  – Jim Grant 

Exploding debt, bubbles, QE, and negative interest rates all qualify as monetary disorder and should be testing our faith in central banking. So it could be argued today’s central bankers prefer gold in slumber – it’s more difficult to pitch desperate policies as solutions when such a historic indicator of non-confidence starts blinking.  Is this why assets are at historic highs and gold isn’t?

Sleep pretty darling do not cry, and I will sing a lullaby…

Conspiracy theories around the manipulation of gold prices abound, especially during slumber.  There are myriad examples of unexplainable large price and volume swings during the very early and illiquid trading hours. There’ve been stories of major banks with significant derivative risk exposure to gold. The bugs are a passionate maddened bunch. But even if you’re not sold on these theories, you can’t deny central banks have been all-in the asset manipulation business generally and cannot afford any vote of non-confidence.

Others argue for a return to a gold-backed standard, something that would necessitate gold exploding higher. The problem with this notion is that it would require central bankers to admit they’ve been wrong all along about their fiat currency debt feeding ways. Could the plight of global finance really reside in such stubbornness, even arrogance?   It has until now.

Whatever lullaby you believe the cause of gold’s slumber, it’s now an interesting time.  If a new form of currency like a Bitcoin can emerge, clearly there is demand for alternatives. If gold can no longer contain the madness of central bankers maybe it’s new roll could be to reflect it.

So, for some perspective, how much gold is out there?  Various sources suggest all of it ever mined is somewhere between 155-171,000 tonnes. Let’s use the number of 166,500 tonnes.   (  About 50% jewelry, 19% investment, 18% world governments and 13% other.

That’s 5.353 Bln ounces.  At today’s price of $1350 all the gold in the world is about $7.22T.

Annual gold production is about 3000 tonnes, or about 96,452 ounces, or $130B.  Anyone’s guess is good but some call this peak production.

Global debt has risen approximately $60 trillion since the credit crisis alone, equating to 461 years of production at current rates! Since 2008 global central bank balance sheets have grown over $10 trillion largely via QE, almost 77 years of gold production.

 Mention that 10 trillion to some people and they glaze over so lets visualize. A tight fresh packet of $100 bills from the bank is $10,000, about a half-inch thick. $10T is a stack 500 million inches tall, or 7,891 miles. If you stack straight up, space is only 62 miles up.

 Currently there are about $13 trillion of global bonds trading at negative yields. While even sand yields more than this $13T, gold’s lack of yield sure seems less an issue in light of central bankings trip to the stars. Remember gold is the currency with no debt or call against it, unlike dollars, yen, euros, yuan, pesos or any other paper money you can name. A currency you can’t print.

The US government’s 8133.5 tonnes of gold is the world’s largest holding, worth about $353B at today’s price. On $20T of debt, $353B equates to what the US would pay in interest in one year if they could fund at an average of 1.77%. At peak Bernanke Fed QE3, $353B equates to about 4 months of printing.  $353B is about 4.5 years of US food stamps handed out or 7 months of US military spending. It’s not even half of the crisis TARP bailout package.

Italy has the world’s 3rd largest government holding, 2452 tonnes or $106B. By comparison, today’s EU systemic hot topic is Italy’s troubled banking system looking for a bailout, sitting on a whopping $400B of non-performing loans.

Japan’s entire bond market out to 15 years is essentially negative yielding.  The BOJ owns half the stock market too and still promises to do more printing.  Swiss 50 yr bonds are negative yielding – a return to the 1% they yielded a year ago would wipe out 1/3 of their value.

In a world of big spending, big debt, big problems, and big central banking experimentation, the gold market isn’t so big anymore.

Obviously of all this gold mined, only a small fraction of that $7T is available for trade, ‘Cash for gold chains’ infomercials be damned. A survey of the top 500 asset managers in the world as of a year ago showed assets under their management totalled $78T. Just a tiny asset allocation from this group along with continued buying by China and India could easily rocket gold out of slumber. A number of very smart respected managers are in. It’s difficult to have conviction on anything in this central bank manipulated world, but the bullish setup is there now more than ever.  Other assets are hitting at historic highs. And while like sand, at zero gold yields more than $13T of negative yielding government debt, sand isn’t a central bank reserve asset. Yet.

For the record, the dynamics of market size in this astronomical world of numbers is even more striking when looking into the silver market. The number for tonnes in existence is quoted as 778,000 tonnes or 25B ounces. At $20 that’s $500B in size. Annual production rates are running 887mm ounces, or just under $18B and supply has been in physical deficit for a few years. Not to rekindle memories of the Hunt brothers because this isn’t the world they played in, but it wouldn’t take that much to squeeze the silver market.

From the original maestro himself, a good question…

“If we went back on the gold standard and we adhered to the actual structure of the gold standard as it exited prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard. I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?”  – Alan Greenspan, June 2016 –


Boy, you’re gonna carry that weight a long time



“Golden Slumbers” 

Once, there was a way to get back homeward
Once, there was a way to get back home
Sleep, pretty darling, do not cry
And I will sing a lullaby

Golden slumbers fill your eyes
Smiles awake you when you rise
Sleep, pretty darling, do not cry
And I will sing a lullaby

Once, there was a way to get back homeward
Once, there was a way to get back home
Sleep, pretty darling, do not cry
And I will sing a lullaby

“Carry That Weight”

Boy, you gonna carry that weight
Carry that weight a long time
Boy, you gonna carry that weight
Carry that weight a long time
I never give you my pillow
I only send you my invitation
And in the middle of the celebrations
I break down

Hello Goodbye

“There are Geminian influences here I think: the twins. It’s such a deep theme in the universe, duality – man woman, black white, ebony ivory, high low, right wrong, up down, hello goodbye.”

“It’s a song about everything and nothing..”        – Paul McCartney –

“three minutes of contradictions and meaningless juxtapositions”.       – John Lennon –

Paradox : a statement that despite apparently sound reasoning from true premises, leads to a self-contradictory or a logically unacceptable conclusion.


It feels like a Geminian time.  Mid stride in a tech revolution, an age of information abundance, people are living longer, biotech offers new promise and cleaner energy is making strides. The rest of the world has never been more part of things.  Yet the globe economy struggles and folks just aren’t happy. It feels like optimism is work and the effort is becoming tiring.




Stock markets are high because bonds yields are so low because things still are bad enough post 2008 crisis that we see a new high in central bank panic and meddling. Read that again.  So bad its good, Hello Goodbye.

Policies are taking us to a place no one has been and further away from whatever normalized financial world we fantasize returning to, whenever that might be. Advertised as stimulus, lifting asset prices from their reality in hope of altering economic reality is simply not working, and actually creating a self-reinforcing loop whereby central banks cannot stop, their facades needing their ongoing attention. The paradox of solving a debt crisis with more debt is clear. If it keeps taking more and more debt to generate a little growth, maybe it’s not working?


IMG_0121.PNGh/t Grant Williams, @ttmygh

There is paradox in their stated fight against deflation. We are led to assume inflation is appropriately calculated to start with even though the methodologies are not uniform nor comparable to a past that analysts so readily draw analogy from. Seen rents, education costs, healthcare lately?  While inflation is famously labeled “always and everywhere a monetary phenomenon”, the decades of easier and easier money has also accelerated the major deflationary investment forces of our time, globalization and labor arbitrage, malinvestment and excess capacity, and especially the disruption fallout of the tech revolution. Disruption will come faster if you push it to.

There is paradox in central banks experimenting with their powers to include eliminating free market pricing of their sovereign government credit risk at a time when indebtedness and these risks have never be greater. What does a rating agency rating even mean anymore when full faith and credit are backed by a central bank printing, zero rates and some Phd’s inflation model? What does it mean to capitalism and the corporate world if central banks, buyers functioning with no investment rate of return motive, are now even buying corporate debt? Where did these academics acquire the power to experiment with what is real and what isn’t by manipulating interest rates into negative territory, turning liabilities into income producing assets and vice versa?  You say yes, no?

They’ve manipulated everything that a textbook free-market long-term interest rate is supposed to reflect – supply, demand, inflation expectations and any sense of credit risk.

There is paradox in the economic growth outlook being so poor and debts so high that rates are so low, and therefore other asset like stocks and real estate so high. Bad news releases or crisis headlines are quickly met with more intervention. Pundits argue for the ‘value’ over these facade yield curves even though premiums now on these other assets approach historically dangerously high ranges, implying future returns have been pulled forward.  Want in?

There is paradox in policies feeding the frenzy of financial engineering going to repurchase stock to juice per share earnings in a struggling revenue environment. Is it a misguided pushing of a string if corporate management uses cheap money to inflate stock prices rather than invest in the business, creating the jobs and wage gains policies presumably target?

There is paradox in the global growing phenomenon of rising income inequality, the wealthy reaping the benefits of these price-lifting policies and broadening the gap.  US elections and Brexit display that income inequality has pushed into the psyche of the voter mind. Within that mix is the paradox of these easy money policies buying cover for politicians, funding government borrowing costs and requirements, enabling a political office do-nothing free ride instead of the hot seat a free and more punitive bond market would otherwise provide. The monetary policies of the appointed have become the trough of fiscal policy of the elected.

There is paradox in the Fed running a QE balance sheet with no hypothetical size limits, while US politicians intermittently debate over the size of US debt ceilings, legislation seemingly put in place to introduce a sense of fiscal prudence to borrowing authority. Not only has the Fed lowered uncle Sam’s borrowing costs but it remits ‘profits’ from their bloated printed balance sheet back to Treasury, about $100 B/yr. Yet no Fed balance sheet yardsticks or ceilings exist, nothing to gauge prudence.  The oversight is convenient when it helps fund $20T of debt and as-far-as-the-eye can see deficits.

There is paradox in policies slowly squeezing the very global financial industry they’ve strived to recover. The lack of interest rate and yield curve crushes bank margins. Negative nominal interest rates mock history and the very premise of a bank business model. Should depositors feel more confidence in a system with negative yields, or panic? Taken to extreme, aren’t negative rates really suicide? How can a reserve banking system rooted by deposits survive if negative interest rates only motivate the deposit to leave? Why would anyone rationally investing for an economic rate of return willfully accept a negative rate of return for a week, let alone for 10 or 20 yr paper? How do the ECB and BOJ plan to exit these policies, even merely returning to zero, without creating shocks?

What to do when even dirt yields more than government debt, let alone a precious rock. It’s a most insane policy and notion, this idea of turning assets into what is tantamount to decay.  Its bad enough that savers, through no prudent fault of their own, are forced to subsidize government borrowing. But a policy that essentially forces confiscation of money that investors lend to government is the largest crack in commercial democracy this world has ever seen. Hello goodbye, still bullish on expensive assets?

Likewise these low rate policies have essentially eliminated a money market industry – what do you pay someone to manage cash when everything inside of 2 yrs maturity yields nothing or negative? The insurance industry and pension funds can’t match liabilities and fund shortfalls without interest yielding product acceptable to match their risk parameters. Do central banks really believe the prudent cure for a financial system collapsed by excessive risk is to force the stretch into more risk, at these historic elevated price levels? Bank and trading operations are forced to layoff staff, and fund management fees pressured by a revenue and margin deflation directly attributable to central policy of administering bull markets.

There is a paradox to policy’s affect on the business cycle. Typically cycles allow for a downturn to help a system purge itself of excesses, creating the investment opportunities of future cycles. Instead, the 00 and 08 bubbles were only met with more and more easing, more and more debt, giving sustenance to the failing capitalism that Darwin would have otherwise taken out. If anything, central bank policy is now the biggest too big to fail.

There is paradox when central banks print to purchase corporate debt and stocks. If a business enterprise is worth its future profits discounted to present, isn’t it a breach of capitalism and democracy when the real money risked for economic gain by investors in a business and a management team, is joined by the printed money of a central bank indifferent to returns yet assuming equal representation? While this activity seems limited to publicly listed companies and ETFs, shouldn’t this new perversion of capitalism democratically mean private businesses or you or I see such investment too? Who wouldn’t want an investor who could care less about their returns? Who gave these appointed and unelected government central planners this moral authority? Since central bank market actions are fungible, where is the BIS in establishing universal standards of what members can and cannot do?

There is paradox in regulators rightly going after dealers and traders for fixing prices, knowing collusion and unfair trading practices are criminal and have no place in what are suppose to be freely trading regulated safe markets. Yet when it is done by unregulated unelected appointed central planners, it’s policy?

There is paradox in seeing the global noise come together at a local level.  Chinese capital wants to flee a bubble economy overbuilt on now $T’s of bad debt.  Some of this money targets Vancouver, a problematically easy place to go, with a weak $C as added appeal.  The $C is down because of excess oil supply fuelled by excessive production funded by excessive borrowing. Whether it’s a bad oil loan, in Texas or Alberta, or a bad construction loan in China, their local economies get pinched and central banks compelled to help. A local Vancouver home buyer is forced to move or strap on an enormous debt load from rocketing prices. Debt, leading to excess, leading to easy money leading to more debt – the stuff of bubbles. It is a cycle trap that probably can’t be fixed without a very painful period of extracting all the banking meddling and allowing the inevitable bubble pops to play out.

Maybe the simplest paradox of all is the collective faith and reliance on these central planners, these academics and bureaucrats whose think steered us into two bubbles and now this current mess and whose solutions have amounted to doing the famously insane same thing over and over again, essentially since the 80’s. Ease, kick the can, delay the inevitable in hope we might somehow avoid it. All the while global debt explodes.  Undeterred after hitting the limits of zero, they’ve pushed their purview to control free markets, long term rates, eliminate sovereign credit risk, to print and re-price assets and risk everywhere, and to take interest rates negative. They’ve made bad news good news, yes no, stop go.  But its not working.


Hello Goodbye

You say yes, I say no, you say stop and I say go, go go, Oh no

You say goodbye and I say hello

Hello Hello, I don’t know why you say goodbye, I say hello

I say high, you say low, You say why and I say I don’t know, Oh no

You say goodbye and I say hello



By Revolution’s release in 68’, the peace and love hippy 60’s were delivering new messages of politics and protest.

“I wanted to put out what I felt about revolution…I thought it was about time we stopped not answering about the Vietnamese war…I had been thinking about it up in the hills in India. I still had this ‘God will save us’ feeling about it, that it’s going to be all right…”                                                -John Lennon, Rolling Stone 70′-

Revolution was the political voice emerging in Lennon. The Beatles initially voted the song down for release as a single out of concern for disrupting their fan base. It’s an interesting juncture, playing politically correct given the turmoil of that era and the voice that music has become, a voice that became much of Lennon’s later career. The band agreed to release the more upbeat remake as side B to the Hey Jude single. Both versions are great.

You say you want a revolution

To this Canadian looking in, these US elections seem frightening. Obama’s ticket of change has fizzled into the same dysfunctional, partisan, questionably financed DC lame duck politics, leaving both parties looking old and tiring. Americans seem looking for a new voice.

Maybe it’s cliché that every incoming president inherits the worst file ever.

Clinton’s 8 yrs in the 90’s left Bush with $5.6T debt and the tech bubble.

Bush’s 8 yrs closed with a housing bubble, global banking catastrophe, too big to fail bailouts and $10T debt.

Obama leaves a fragile world of bubbling stocks, bonds, real estate and +$19T debt.

Three 2-term presidential cycles, each handing off bubbles and a doubling of debt, isn’t cliché.

Don’t you know it’s gonna be alright

 While democracy is the power to remove people that govern, a key element to these years has been the appointed unelected Fed. Maybe akin to Lennon’s “God will save us”, there hasn’t been a crisis that they haven’t tried to make alright with more easing, leading further down the hole of debt.

As stewards of financial prudence they own an abysmal forecasting track record. Greenspan’s 96’ “irrational exuberance” didn’t see the tech bubble, after which claiming the Feds’ role was not to manage bubbles but to clean up the subsequent mess. In so doing they spawned a housing bubble they also claimed they did not see, a devastating systemic banking malfeasance of leverage and fraud and outright bad Wall St behavior that flourished under Fed oversight.

“Get to work Mr. Chairman.”                                                                                                                                      –Dem Sen Chuck Schumer, to Fed Chrm. Ben Bernanke, 12′ –

 The Fed’s QEs crossed a line of playing with their appointed powers over free markets. Designed to elevate assets and advertised as stimulus, it’s proven to benefit Wall St more than Main St, exacerbating the now hot political issue of income disparity. Separating asset prices from free market reality doesn’t seem to be working. These monetary experiments command no accountability and because the dollar is the world’s reserve currency, they’ve served as a model for modern day central banking think for the rest of the world.

QE’s and low rates help fund and manage this massive US government debt, making the Fed DC’s power chord, the DC enabler. The Fed would argue otherwise, that DC’s dysfunction and fiscal incapacity render the Fed the only show in town, that the Fed is buying DC time to get its act together. But it’s symbiotic. Politicians won’t act if they don’t have to and certainly won’t reach across the partisan aisle if the Fed keeps the free-market monster from the political door. And, after 08′, nothing fears central bankers more than free-markets.

 So the world still limps and these appointed unelected unaccountable enablers remain stuck in policies they cannot escape, leading the rest of the world into similar fate. Globally central banks now sit $12T QE deep and counting, with a whopping $9T of global debt priced at negative yields. Central banks are toying with the very foundations and concepts of money and banking that centuries developed. By buying corporate debt and equities they pry into the very mechanics of capitalism. Do voters really get this influence?

You say you got a real solution

 There is a deep irony in the backlash the Republicans felt for threatening to shut down government over America’s self-imposed legal borrowing authority. It was an intersection between this debt and DC dysfunction.

In any event, the party has had 2 terms to groom a nominee and the best they could find annihilated their own. The next best front-runner was of fringe tea-party roots. How more divided and divisive could they be?

Along the way Trump has managed to offend women, blacks, American Indians, the disabled, Mexicans, Muslims, POWs, NATO, the press, the legal community, his competitors, and his chosen party’s elite. What’s it say about a party in disarray when a self-adulating, uninformed and politically incorrect outsider can take it hostage? Attacks on Trump by his own party will weigh. It’s shameful to see values erode when individuals stretch to unite in endorsing someone they don’t support but feel they must. This billionaire class DC outsider represents a revolution of sorts but so far one that seems to be taking the party down, not lifting a country up.

If Trump is the first presidential candidate being sued while running for office, for of all things, scamming the public via Trump U, Hillary is the first presidential candidate risking indictment.

Despite the many old and quite new skeletons in Clinton closets, as Democratic royalty, Hillary was pre-ordained. But the Sanders revolution out of left shows an equally powerful Democratic search for a new voice away from DC as usual.

Both these current revolutions are driven in part by lack of income growth, economic stagnation and growing income inequality. Sanders specifically targets Wall St. The Clintons specifically are very much tied to Wall St., complicit with the 90’s reforms that created too big to fail banks, elevated risk taking leading to the worst financial crisis the world has ever seen. Hillary has even recently milked the relationship, making $mms speaking to Wall St. To suggest she is part of the old crony DC capitalism that voters, including Sanders’ Democrats, are revolting against is an understatement.

So both parties are divided by their own revolutions.  At the moment it seems its “Anybody but Hillary”, the devil we know, against “NeverTrump”, the one you might understandably be very afraid to.  Never more so, the election seems a vote against something rather than for.  Are the solutions for America’s woes really in building walls, better trade deals, debating hand size or free college?

This winner inherits a jackpot of almost $20T debt and global bubble central banking. China’s bubble beckons, Japan locked in stagnation, the EU experiment seems failing and income disparity is a growing global phenomenon.

You tell me it’s the institution, Well you know, You better free your mind instead

Shocking DC isn’t a bad thing. So maybe reassessing the unelected intrusive power of central banking wouldn’t be either. Not in a ‘abolish the Fed’ extreme, but in the spirit of exploring a redefinition of powers. Does leadership see that central bank manipulations and distortions are taking the world further down a debt hole or do they enjoy the cover? If voters are the shareholders of government, do voters know who the shareholders of the Fed are?  If the elected can’t be held accountable by hiding behind the policies of those that aren’t, then the system is busted.

Sanders the socialist was naturally mocked by those to his right for all the free stuff he planned to hand out, his Robinhood-like pitch to tax Wall St. to pay for it all. Yet, where in political dialogue is the discussion of the relatively free ride the US government receives in the form of QE funding, manipulated borrowing costs and Fed “profits” reimbursed, at a cost to savers and income disparity? The symbiosis is inconvenient conversation for any politician. That is the problem.

Anyone following markets for a time should agree these extraordinary times feel like transgression, a crossroad between capitalism and intervention, presumably a desperation to delay an inevitable pain of years of accumulated debt and bad behavior. Nothing screams louder of this then Japan and the EU diving into negative interest rate insanity. Maybe this transgression, this undertone that all is not well, is finally seeping into politics and rooting revolutions. Maybe these revolutions suggest the symbiosis is headed for a crossroad too?

Free-market monsters are always there, even if forced into the weeds temporarily, modeled away by the same unelected academics whose models brought us here. Living with free markets and their very natural self-policing nature is called prudence. Finding a way back there is maybe the revolution the world really needs. It just isn’t on this ballot yet.

You Tell Me Its the Institution II

Since this post, the world’s turmoil over Britain’s vote to exit the EU has generated a list of explanations, not the least of which is a national pride no longer willing to succumb to the terms of unelected EU bureacrats – a definite revolution.  Already some disgruntled EU members wonder out loud about their options.  On the one hand it is numbing to hear this event being compared to the Trump movement.  On the other, they do both represent a vote against status quo and political elite.  Central bankers will no doubt panic in coming to financial market relief, reminding the world of their usefulness and importance.  Over time, it should not be lost on anyone to ask what role central banking plays in this EU experiment.   If nothing else Brexit serves notice to the ECB et al that revolution can come fast.




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About Beatlesonbanking

This notion is like most writes, the simple opportunity to organize some occasional thinking.   I wrote a few pieces, stopped, and just recently picked it up again.

Simply, a weekend NYTimes piece a few years ago posted a photo of central bankers in what struck me, odd I know,  as iconic Beatle form.  The idea of mingling their words with some market thoughts was planted.


nytimes original  The-Beatles1111


As a 60’s child I grew up cherishing their music and so if nothing else mining their past makes me happy.

I’ve spent a career  following and trading in markets.  I wrote my Canadian Securities Course test, the US equivalent of Series 7, in 1979 when I was still in high school.  I’ve traded bonds on the buy side and sold them institutionally around the world from Toronto for MYW (Scotia) and Goldman Sachs.  I’ve sold energy equities for FirstEnergy Capital in Calgary.  By the tech crash, this bond trader who really wanted to be an equity analyst gave up institutional energy sales because he’d shorted tech stocks.

We settled in Victoria BC to raise our family and I’ve remained immersed in markets and trading since.  Working from home, there are days I miss a more professional environment.  I did have the great experience of working with some world class talented people. But I recall many retirement memos in which so and so, at 65,  was looking forward to spending more time with their now fully grown and gone kids.  I’m unapologetically ecstatic to have been able to be around for mine while they were still around and more so now that the nest is empty.

I must say it’s easy to feel like a dinosaur these days.  Today anyone in the business of markets in their early 30’s or younger have only seen interest rates near zero and stock markets incessantly rise on bad news because of the promise of more monetary cocaine.  When I was 30 interest rates in Canada were in the low teens.  Once upon a time big debt supply and deficits pushed interest rates higher.  Since the credit crisis things don’t work that way anymore.

On the surface, writing about central banking and markets might be the absolute most dull topic imaginable.  In a normal world it should be.  But these are not normal times and much of the prosperity behind booming asset prices is underwritten by the desperate experimentation of these appointed academics.  An experimentation from which the politics of out of control debt gets to hide.  In some ways the great recession never ended.  So we have the Great Manipulation, a policy of separating asset prices from their otherwise reality in hope of changing the economic one.  Their search for stability has created a fragility that they cannot now escape.

How this era ends is anyone’s guess.  As Citibank’s ex-CEO famously said before the credit crisis, as long as the music is playing keep dancing.  Only now this music is getting made up as we go, and by the same people and think that created this historic mess in the first place.


George Stockus