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.

 

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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