Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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May 09

Trust in the Fed Driving US Stocks

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No, not a bubble yet. But global risks face investors’ faith in US stocks…
 

JOHN MAULDIN is a New York Times best-selling author, columnist and financial TV pundit.
 
Assisting investors through his Millennium Wave Advisory and sharing his insights weekly thorugh his free Thoughts from the Frontline e-letter, he is also chairman of Mauldin Economics, created to provide individual investors with his big-picture thoughts on the global economy.
 
John Mauldin speaks here to The Gold Report about the global themes driving his analysis today…
 
The Gold Report: John, you’re one of the best-connected newsletter writers in the business. When you and I last chatted, the fiscal cliff was looming. Will the US continue to lurch from one politically motivated crisis to another artificial crisis, or have politicians in D.C. learned their lessons?
 
John Mauldin: I guess it depends on which politicians you’re talking about. There are some politicians who get it. There are others who don’t. I think that government is still the solution to the problem. In the end, it’s going to take the equivalent of a knock on the side of the head by a two-by-four in the form of the bond market. Or voters could express their frustration with the direction of the country at the ballot box. That’s possible.
 
Maybe the Republicans can realize that where they are is not where the voter population wants to be. They would have to change some of their programs to adapt to a younger generation and single women, because that’s where the Republicans are losing their message of fiscal conservatism, which is actually quite popular in those demographics. It’s all the other baggage that goes along with the Republican brand that is the problem. The same thing is true for Democrats. Their constituency is also fiscally conservative. 
 
Perhaps after 2016, we could see a move to balancing the budget, which is really all we need to do. To do that, we have to figure out how much healthcare we want and how we’re going to pay for it. That’s going to take some compromises on both sides. I think both sides recognize that at the end of the day, if we don’t solve that question, then all the other questions become secondary.
 
TGR: You’re talking about compromise. The fiscal cliff was partially a crisis around using the raising of the debt ceiling to impact policy. Will that continue to be a flash point or have people decided that that’s not the way to fight?
 
John Mauldin: Democrats and Republicans alike have used the debt ceiling a handful of times in my lifetime. This last time it was politically not rational to use it, so it didn’t get used. But we’ll see it used again. There has to be some moment of crisis, something that forces people to compromise. Seemingly, we just can’t be rational and sit down like adults.
 
TGR: You are going to be speaking at the Strategic Investment Conference in San Diego along with Newt Gingrich and John Hunt. Your specialty is explaining the forces driving the global economy and investment markets. I have to ask the question everyone watching the upward climb of the indexes wants to know: Are we in an asset bubble? What is supporting it? What could pop it?
 
John Mauldin: I don’t think we’re in an asset bubble. We’re in a period of very high valuations, but it doesn’t look like bubble territory. We have seen serious bear markets start at this level, but there is nothing to say that it couldn’t go higher.
 
What’s driving the market is sentiment, the story – which is trust in the central bank. I’ve been writing for years that if there is a bubble, it’s the bubble in the belief that the Federal Reserve can actually control things, that it is actually in charge and that the markets themselves don’t have to do anything but just follow the path of the Fed. That’s a lesson that always ends in tears.
 
Central banks and policymakers can’t control things. When valuations get stretched too far, they snap back. When it comes to popping this current valuation expansion, it could be a China slowdown or international debt challenges.
 
Bill White, former chief economist for the Bank for International Settlements, who is now at the Organisation for Economic Co-operation and Development, is arguing that we spent the last five years trying to increase demand in the economy when we should have been repairing the balance sheet. We haven’t addressed the primary cause of the crisis, which was out-of-whack balance sheets. We haven’t reduced the debt. We haven’t been reducing leverage. There are ways to deal with debt, but none of them are pleasant. None of them are going to make people happy. The reality is we still have too much debt and we haven’t dealt with it, especially in Europe. Europe is still a problem.
 
German banks are significantly overleveraged; they have a lot of bad debt on their books. We are a few sovereign debt crises away from a serious banking crisis there. Think about this. We have allowed Spanish, Italian and Greek bond rates to fall to pre-crisis levels, and yet the debt/ GDP ratios for every one of those countries are significantly higher. Spain and Greece have 25% unemployment and 50% youth unemployment. France’s GDP is shrinking, not rising. I think that Europe could be a serious problem when markets realize some European countries can’t pay their debts and start asking for higher interest rates. And it accelerates rapidly. It’s the old Ernest Hemingway line, when one of his characters asks how the other went bankrupt. And the guy said, well, slowly, then all at once.
 
TGR: We have been talking about the market as if it’s one thing, but are commodities, technology, banking and energy all reacting differently, both in the rise and what sounds like the inevitable fall? Will some do better than others?
 
John Mauldin: Yes, they all do act differently. Not everything is going to fall. There are always stocks that create value, businesses that have figured out a new approach. There are things that are solid. We are still going to buy Coca-Cola, soap, food. We’re going to need to consume energy. The price that we pay for a Dollar’s worth of earnings may change, but the underlying true value of the company will still be there. Sometimes we just have to recognize that we need to accumulate assets that are going to be valuable at the other end of the crisis.
 
Governments are going to have spastic-type movements if they want to monetize debt as they try to minimize the effects of their bad policies. And it doesn’t work. The cure central banks and governments have come up with is quantitative easing. That makes the problem worse and can lead to catastrophic problems.
 
TGR: How close are we at this point in Europe or in the US to a catastrophic problem?
 
John Mauldin: We could see another crisis in Europe within the next few years. The US is still some time away. Japan is in the process of destroying its currency. I’m hedging a significant part of my mortgage in Yen, and I’m buying 10-year options on the Yen with out-of-the money strike prices because I think the Yen is going to go to 200 [to the Dollar] over the next 10 years. [The Dollar’s Yen rate] may go much higher.
 
Currency markets are terrible in Japan. Japan has been called a widowmaker for very good reasons. I think Japan is committed to a serious process of monetization. It could be putting as much as $8 trillion into the world’s economy through QE. That would be the equivalent of the US printing $32 trillion for its balance sheet. At 250% debt-to-GDP, it has painted itself into the mother of all bad corners.
 
If you’re sitting with a long bond position entirely in Japan, you’re not going to be very happy at the end of this 10-year process. If you are short the Yen and you’re sitting in the US, you’re going to be able to buy a Lexus cheaper than you can buy a Kia. Sony TVs are going to get cheaper and cheaper. Their robots might be cheaper. So it might be a good thing from our point of view, but not from the Japanese retiree’s point of view.
 
The same problem could be lurking in the US if we don’t get our act together. I’m still optimistic that we will. We did it in the 1990s. Who knew we’d be nostalgic for Clinton and Gingrich? We could make the same decisions again. I’m less confident that France and Italy will be able to make those decisions. I think there could be some problems.
 
TGR: If we’re looking at a looming sovereign debt crisis in Europe and Japan, what asset classes should US investors be considering?
 
John Mauldin: My view is that given the rise of energy production, we’re going to see the Dollar get stronger, not weaker. I know people are talking about the end of America, the end of treasuries – I don’t believe that’s going to happen. If we go back into a QE program in a few years, we could see an inflationary period at the beginning of that cycle. But that’s off a ways.
 
US investors do need to watch out for disruptions in the rest of the world. That could reduce the consumption of commodities. That’s not a very good prospect if you’re in South Africa, Canada, Australia or Brazil, one of the commodity-producing countries.
 
TGR: John, you’ve named China as one of the biggest macroeconomic problems in the world today. Is the problem the debt from recent expansion, or a slowdown in the expansion?
 
John Mauldin: The answer is, probably both. Since the end of World War II, we have had the Italian miracle, then the Latin American miracle and the Japanese miracle, followed by American, Irish and Spanish housing miracles. All those ended in rather spectacular busts. China’s miracle has the same two components: rising leverage and excess construction. China’s leaders are very cognizant of this. The proposals they’ve made are some of the most far-reaching since Deng Xiaoping. They could really be dramatic change-makers if they do what they say they’re going to do, but that path is going to produce slower growth.
 
The Chinese have to figure out how they are going to restructure their debt while protecting consumers and depositors. They seem to be doing that. But it’s a very difficult path, because they’ve expanded their debt by massive amounts, which historically hasn’t ended well. Now they are trying to be proactive about it rather than just pushing it to the end. So I’m hopeful that it’s just a slowdown, but I’m cautious in saying it could be more if they make a policy mistake or something happens out of the ordinary.
 
TGR: Even with the slowdown, China is growing. It’s just not growing as fast. Wouldn’t that be good for stocks?
 
John Mauldin: When I was in South Africa, I met business owners who had factored in 7% and 8% growth to their business plans. Chinese growth has fallen pretty seriously. The world has gotten used to its built-in models.
 
TGR: There has been a lot of news recently about conflict in the South China Sea and Ukraine. To what extent do you think that war might be a black swan that will impact markets?
 
John Mauldin: God, I hope not. War would certainly affect markets, potentially significantly. I just hope cooler heads will prevail. I can’t see the US going to war over Ukraine. We’ll just increase sanctions. Will that hurt Russia? Yes. It’s already hurting. Money is fleeing the country. Stock markets are down. Russia seems to be willing to pay the price to have Crimea. Maybe it’s going to try to figure out how to absorb part of eastern Ukraine directly or as an autonomous region so that it doesn’t have to worry about its border.
 
TGR: John, you’re always very positive about technology and the impact technology will have on our lives. What technological advances are you most excited about now?
 
John Mauldin: I continue to be mostly excited about biotech, maybe because that is what’s going to personally affect me. We got rid of smallpox, diphtheria and polio – those were big changes. We’re going to see those types of events happening every year now. I think there’s potential for a cure for cancer on the horizon, for liver disease, for chronic heart disease, for arthritis, Alzheimer’s. Those things are coming soon. What those dramatic changes mean for many of your readers is that they need to plan to live a lot longer.
 
Energy is also exciting. After a couple more decades of improving solar technology, sun power will be cheap enough to replace oil. In the next 20 years, we’re going to become natural gas exporters. That will do great things for the economy.
 
Most of the developed world is still trying to rise up through the second industrial revolution. They’re coming at it much faster, but they have a long way to grow. As they go through that, they’re going to want more protein, more metals. The growth in biotechnology is a function of Moore’s law. We’re seeing more change. We’re going to see, in the next 10 years, some of the most incredible advances in human history.
 
We’re going to see changes in computing power. I’m talking to you on a mobile phone that is 1,000 times more powerful than the phone I had 15 years ago. In another 15 years, I will be talking on a phone that will be 1,000 times more powerful than the one I have today. If the trend keeps going, it will be the size of a button, but the possibilities will only be limited by the scope of our imagination. Facebook and Google are buying high-altitude balloons and solar-powered drones with advanced communications systems that can track anything. Everyone will be connected, not just in the US but throughout the Middle East and India. Those kids are going to have access to systems that will allow them to improve their lives and their families’ lives.
 
The amount of change that we’re going to see is simply an accelerating trend. That’s in juxtaposition to the amount of growth we’re seeing in sovereign debt, which is destructive. The question becomes: Can government and central banks destroy wealth faster than technology and humans create it? And it’s going to be a race. In some countries, citizens will lose. Some countries’ citizens are going to win. I think each country, each region, has to be responsible for deciding that it wants to be in the winner’s category.
 
TGR: John, thank you for your insights.
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May 02

Che Guevara Reads Piketty

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Thomas Piketty doesn’t seem a big fan of capitalism. But then, who is…?
 

On SUNDAY, we became godparents to a six-month-old girl, writes Bill Bonner in his Diary of a Rogue Economist.
 
A cute little girl, with dark skin, dark eyes, dark hair…and chubby cheeks. Her mother, as near as we can tell, is a descendant of the local Diaguita tribe. The history books tell us that the Spanish tried to exterminate them…but they seem to have failed.
 
Up here in Argentina’s Salta province, according to local tradition, landowners are often asked to be godparents to children born on their farms. Who could refuse? We’re not sure what to make of this new and totally unexpected responsibility. But heck, you take things as they come…and do your best.
 
Meanwhile, we’re dissing a book we haven’t read. Paul Krugman calls Thomas Piketty’s Capital in the Twenty-First Century a blockbuster. We can’t wait to get our hands on a copy, just to see if Piketty is really the blockhead he seems to be.
 
Already we pointed out that real capitalism is self-correcting. Piketty is worried that capitalists are making too much money. The returns from investing, he says, are outstripping the rewards to working stiffs.
 
Piketty expresses this as r > g…where r stands for the average annual rate of return on capital (including profits, dividends, interest, rents, royalties and other forms of income from capital) and g stands for the rate of growth of the economy.
 
He really shouldn’t worry about it. When rates of return are high, investors pile in. Then, with too much money chasing too few good investments, the rate of return – r – falls.
 
Often, investment returns fall so hard investors cry out in pain. But that is just the way it works. You can’t enjoy the pleasure of profits without the pain of losses from time to time.
 
Thomas Piketty doesn’t seem like a big fan of capitalism. But then who is?
 
“I guess you’re having your crisis of capitalism in the US,” said the woman who runs a nearby welfare program. She rode up on a motorcycle (a two-hour drive) so she could help the locals improve their lives. Dressed in khakis, she is the sort of woman you could be marooned with on a desert island and not break your marriage vows. A round face…a round body…she nevertheless seemed to have a sharp edge.
 
“I hope you Americans are holding up okay,” she said with the cheerfulness of a vegetarian in an abattoir.
 
For her, capitalism is a doomed creed. It is just a matter of time before it is replaced by well-meaning, correct-thinking vegetarians who make sure the chips fall where they want, not where they may.
 
We figured her out when we visited her headquarters and found a picture of Che Guevara on the wall. She is no fan of capitalism either.
 
But she is not alone. Capitalism has so few real aficionados they could all probably be rounded up and shot in an afternoon.
 
The poor don’t like it because they think it – rather than their own bad luck or bad habits – keeps them from getting rich. The rich don’t like it because it threatens to ruin them with crashes and bankruptcies. Businessmen don’t like it because its process of “creative destruction” threatens to make their industries obsolete. Intellectuals don’t like it because it is inherently unpredictable and uncontrollable. The media doesn’t like it because it gives no press conferences and provides no “talking points” for lazy journalists. Investors don’t like it because it punishes their mistakes.
 
And of course, professors of economics hate it more than anyone. Why? Because it refutes their claptrap ideas about how an economy works.
 
And so they all – rich, poor, mighty and miserable – turn to the government for succor. Why the government? Because it is the only institution that can lawfully stop capitalists from creating wealth.
 
Piketty’s observation – that the richest have gotten much richer over the last three decades – is not wrong. It’s too bad that he can’t think more deeply about how it happens.
 
He believes when wealth is concentrated in few hands there follows a phenomenon he calls “state capture.” Rich people are able to get control of the government and use it like amafioso with a baseball bat: to whack their challengers and skim the profits.
 
But the state is no chaste and innocent participant. It is not “captured” at all. Those with control of the police and the military are no strangers to the baseball bat; they use it regularly. In fact, they often take the rich hostage and demand as much ransom (taxes…bribes…campaign contributions…payoffs to special interests) as they can get from them.
 
More often, they simply connive and conspire with any group that can help them – rich and poor, labor unions, business groups, lobbyists and so forth – always subverting capitalism and undermining the public welfare.
 
Our old friend Jim Davidson tells the story of the “sugar daddies” who have gotten billions of US Dollars in direct and indirect subsidies over the years.
 
They learned their trade – bribing politicians – in Cuba before Castro took over. In the 1960s, they brought their techniques to the US. They managed to get much of the state of Florida drained at taxpayer expense, so they could plant cane and sell sugar at artificially high prices.
 
You have to admire “Pepe” and “Alfy” Fanjul; they know how the game is played. Alfy is so well connected, according to the Lewinsky affair report, that he had President Clinton’s ear when Monica had another of the president’s parts.
 
Crony capitalism is just a part of the way the economy is twisted and corrupted. Health care, finance and education – the biggest industries in America – have been largely captured by Washington (or vice versa).
 
You might say, too, that the feds acted after the crash of 2008-09 to protect the wealthy. Without their intervention the problem of inequality wouldn’t exist; as much as half of their stock market wealth would have been wiped out…and probably would have stayed wiped out.
 
The feds might just as well have wished to spread the wealth among more voters. But the goal was not so much to make the rich richer. Instead, the feds just wanted to keep capitalism from doing its thing. Stephen Roach explains:
“The Fed’s strategy [has been] to get the share markets up, get risky assets up, [and] stimulate the economy through ‘wealth effects.’ One problem: ‘wealth effects’ are for wealthy people. What about the real problem in America, which is middle-class, structurally unemployed, workers and their families? Are they benefiting from the ‘wealth effect’?”
They’re not?
 
Well, then rant about inequality…and crony capitalism. Write a bestseller. And find more ways to stop real capitalism from taking place.
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