Rothbard And Friedman Agree On Low Interest Rates

While Friedman's stance to many may appear controversial, Murray Rothbard puts down the Mises' script in a very simple manner:

People's time-preferences also determine the extent to which people will save and invest, as compared to how much they will consume. If people's time-preferences should fall, i.e., if their degree of preference for present over future falls, then people will tend to consume less now and save and invest more; at the same time, and for the same reason, the rate of interest, the rate of time-discount, will also fall. Economic growth comes about largely as the result of falling rates of time-preference, which lead to an increase in the proportion of saving and investment to consumption, and also to a falling rate of interest.


But what happens when the rate of interest falls, not because of lower time-preferences and higher savings, but from government interference that promotes the expansion of bank credit? In other words, if the rate of interest falls artificially, due to intervention, rather than naturally, as a result of changes in the valuations and preferences of the consuming public?

What happens is trouble. For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Well, in this light the argument of Keynesian output gap is an intellectual trap? Even worse, if one believes that recovery will be driven by corporate investment ... only after depletion, or trouble follows soon again.

Reality, Perceptions And Dreams About US Wealth Inequality

From the latest post by Dan Ariely:

What this tells me is that Americans don’t understand the extent of disparity in the US, and that they (we) desire a more equitable society.  It is also interesting to note that the differences between people who make more money and less money, republicans and democrats, men and women — were relatively small in magnitude, and that in general people who fall into these different categories seem to agree about the ideal wealth distribution under the veil of ignorance.

Well, and then add some practicalities as per Steve Waldman ...

Reading DeLong's Six Lectures On Depression Economics

"Gentle Keynesian" touch in Six Lectures on Depression Economics by Brad DeLong, just like you were a student at U.C. Berkeley ...

Richard Koo About QE, Money Supply And Inflation

Some excerpts from the note by Richard Koo, the chief economist at Nomura, as of yesterday:

Money supply will not grow as long as private sector is paying down debt

The explanation for this phenomenon is quite simple: in a balance sheet recession, where the private sector is striving to minimize debt, the money multiplier is negative at the margin. No matter how much liquidity the central bank supplies, the private-sector money supply will continue to decrease.

Money supply growth is an essential component of inflation. The majority of the money supply consists of deposits, which are financial institution liabilities. For these liabilities to increase, the loans that represent financial institution assets must also increase. But when the private sector is trying to minimize debt, loans actually decrease.

Individuals and businesses repay debt by drawing down deposits, but if the entire private sector behaves in this way the money supply will decline. During the Great Depression, which began in 1929 and was the classic example of a balance sheet recession, the US money supply shrank by 30% as businesses and households moved collectively to pay down debt.

However, there are some doubts about paying off the debts, but rather defaulting on them. Before we start celebrating, one would consider whether deleveraging could never start, or whether the defaulting is actually not worse?

Well, then Richard Koo moves on with fiscal consolidation:

For the government to pursue fiscal consolidation and reduce borrowing at a time when the private sector is paying down debt means the money supply will decrease regardless of how much liquidity the central bank provides.


This move by businesses and households to minimize debt is the reason why Japan’s money supply did not grow and why inflation did not accelerate despite the ¥30trn in additional funds supplied by the Bank of Japan. It is also why the US money supply and inflation have remained stagnant despite the Fed’s $1trn boost to liquidity.

So, the end game should be nasty, and probably Japan will lead in this roulette, but the bet on final chapter of the game already now may be costly ...

SocGen Gauges The Potential For QE2 Success

Fed is supposed to be designing your inflation expectations, that outweighs the risks ... in worst case those of currency debasement, which will be followed by the collapse of real activity and currency struggle typical for emerging markets.

Click on picture to enlarge, courtesy of Societe Generale.

J.P. Morgan: Central Banks Are Boosting Confidence

Is this another "In Ben we trust" story at J.P. Morgan? Current markets view suggest to add risk as short covering in equities is supposed to be good investment strategy:

• Economics: Activity data are tracking our forecast of growth close to potential.
• Asset allocation: QE boosts investor confidence. Add risk.
• Fixed income: QE on the horizon supports core bond markets, but look for Australia and Canada to decouple.
• Equities: Negative pre-announcements point to a worse EPS outcome in 3Q relative to 2Q, but seem largely priced in. Short covering has further to go.
• Credit: Medium-term strategy remains long credit, favoring EM over DM, corporate over state, and US over Europe.
• FX: Add to USD shorts.
• Commodities: Much stronger-than-expected demand for crude oil leads us to raise price forecasts, from $75 to $81 average for 4Q. Go long crude oil.

Broad Money Growth Stabilising ...

From the economists at BNP Paribas today:

Broad money growth is showing tentative signs of stabilising at very depressed levels…

Despite still-rapid growth in narrow liquidity, broad money growth remains extremely depressed, although there are tentative signs that the growth rate is flattening out.

Broad money growth across the G7 has stabilised at around 2% y/y, its lowest level for at least 25 years. The combination of fast narrow money growth and sluggish broad money growth means a continued slide in the money multiplier.

Canada and Japan are showing the fastest broad money growth rates at 5.9% and 5.0% y/y, respectively. The UK and eurozone, with broad money growth at close to zero, are the laggards. US broad money growth has picked up to almost 2% y/y, although it remains below the 6% y/y pace registered in late 2009.

Click on chart to enlarge, courtesy of BNP Paribas.

Continued slide in the money multiplier?

Trans-Atlantic Credit Miracles

EconompicData had a story of Microsoft borrowing on the CHEAP yesterday. However, on the other side of Atlantic, the credit affairs, according to Suki Mann, the credit strategist at Societe Generale, less bullish than the headlines from the other side of pond suggest:

European credit investors are getting a little bothered by the poor performance of new issues at the moment, and rightly so. The market actually might not be in great shape. Everybody thinks everybody else is a buyer - hence the oversubscription levels and no follow through. The problem is that the issues are priced rich but a fragmented European market place continues, as always, to get dragged in. There is an almost blasé attitude developing in some quarters that we will be ok in a few weeks when the deals will get absorbed better. Some will but we shouldn’t take it for granted that they'll all trade through reoffer. Short memories only go back to 2009 when that was the case - uniquely; in the history of the credit market there were many more years when this wasn’t so. All deals won’t/shouldn’t necessarily trade through reoffer levels. After the Fed communiqué on Tuesday, we’re now prepared for yields to stay low for longer. That does mean a continued demand for (higher yielding) credit and this will - unfortunately - support the issuer/syndicate axis for deals to continue to be priced rich versus secondaries. Broadly, there is increasing concern on the level of supply and how much we might get going forward.

Also equities are less enthusiastic on the European side ...

Fed's POMO & S&P 500

It is not only Zero Hedge, but also BNP Paribas believes that Fed's POMO helps risk assets in general:

In the meantime, as we noted yesterday, what is helping in addition to growing expectation of further QE has been the POMO (Permanent Open Market Operation) actions by the Fed, where the Fed purchase USTs and put money out into the financial system, increasing the liquidity in the system and reducing the amount of USTs to help bring down yields and hence risk premia and this dynamic plays out throughout the risk spectrum. By not retiring cash from mortgages that are being refinanced and maturing, the Fed is preventing the money supply rate M1 from falling and also hurting a fragile economy.

Click on chart to enlarge, courtesy of BNP Paribas.

Is it free market capitalism?

Fed Decides To Stay On Sidelines

WSJ MarketBeat has posted the Fed Statement: What Market Watchers Are Expecting before the event, just to provide some pre-light.

While Fed uses seducing inflation language, Fed "... will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed ... ".

So, the economic optimists should not expect any additional accommodation, before it gets really worse? The bears should also be disappointed, as it is not that bad in the eyes of FOMC to provide additional accommodation now?

Either it is better than the leading indicators suggest, or markets have been eating hope recently? You decide ...

WSJ Real Time Economics is parsing the Fed ...

Quote Of The Day

This comes from Dennis Gartman, the editor and publisher of The Gartman Letter, in the report today:

Much is being made recently of the weakness in the ECRI Leading Index, but all we know from past history is that when the Index reaches the extreme lows such as it has reached recently that marks the end of economic weakness rather than the onset.

Just in case someone is still gaming the cognitive dissonance?

Cheering About US Demographics?

There are thousands of arguments why the US is not Japan. Demographics is one of them. I have been musing about inequality a lot, but look at latest data here. While I still do not love Krugman (but I am impressed, and will, likley, start loving at later stages of economic pain?), he explains why the argument of better demography in US as a reason avoiding Japanese experience is false. While demographics are, of course, better in US, but inequality ...

Chinese Slowdown

Despite the recent cheer, like here, Sean Corrigan, the chief investment strategist at Diapason Commodities, writes today:

A further slowdown seems all but inevitable, even without any extra degree of restriction.

Click on picture to enlarge, courtesy of Diapason Commodities.

It is worth keeping an eye on Shanghai Composite and, probably, copper (it may though be infected by metal flu) too ...

Demographic Discounts For Equity Price-Earnings Multiples

Just like the Tim Bond back in January, the strategists of Societe Generale are drawing similar conclusions about demographic projections suggesting additional discounts to equity prices from earnings multiples.

Click on charts to enlarge, courtesy of Societe Generale.

However, this seems rather interesting:

An obvious criticism of this type of reasoning is that you do not have to be American to buy US equities. Populations are getting younger in a number of emerging markets and some of these foreign savings could be easily be recycled in the US equity market. While not unreasonable, we think that this line of defence is a fragile one. For example, the Japanese experience of the 1990s shows that a demographically healthy West lent absolutely no support to local equity valuations. In addition, even though foreign ownership of the US equity market has been increasing, the US market has still been on a de-rating trend for about a decade.

Japanese have all sorts of experience, also today in FX markets ...

Fear The Upside Surprises In Economic Or Corporate Data?

Bank of America Merrill Lynch published their monthly Global Fund Manager Survey today. All in all, there seems to be little changes since last report, although the markets have managed to run another round.

The September consensus: anti-growth, anti-risk
Investors remain cautious and risk averse; they are poorly positioned for any upside surprises in Q3 economic or corporate data. Growth expectations are stagnant; margin expectations are down and cash levels up.
Where is the optimism? EM equities, Chinese growth and equities as an asset class, which are now thought to be extremely cheap compared to bonds.

On growth: expectations stagnant, but China back on track
Investors are evenly split on whether the global economy will improve over the coming 12 months, with more than three-quarters anticipating a world of below trend growth and inflation. There was a notable drop in expectations for corporate margins. The good economic news is on China with a net 11% now expecting stronger growth over the next year up sharply from the pessimism of recent times.

On risk: hedge funds stirring but risk metrics down
Hedge funds raised their gearing levels to 1.39 from 1.16, the highest level since March 2008. Elsewhere however, risk measures were cautious. The BofA-ML Risk Appetite & Liquidity Index slipped back to 37; average cash balances rose marginally to 4% and a net 20% are overweight cash (highest since July 2009). Jitters on Ireland raised EU debt funding in investor ranking of principal tail risks with premature fiscal tightening and US muni default seen as the other key risks.

Bond versus equities: relative valuation at extreme
Investors view bonds as the most expensive relative to equities since we started gathering bond data in early-2003 (a net 38% view equities as undervalued; a net 68% see bonds as overvalued). Yet asset allocators reduced their bond UW, are significantly OW cash (+18%), modestly OW equities (+10%) and slightly OW commodities (+4%).

The contrarian trade: Japanese equities
Profit expectations for Japan (-39%) are the worst since April 2002. A net -32% of
investors are UW the Japanese market, the lowest reading for 9 months. 72% of investors view the Yen as overvalued (the highest ever). Japan is the biggest contrarian trade in this month’s survey. Elsewhere, EM equities remain OW while views on US and EU (both equities and currencies) drifted towards neutral.

Equity sectors: going on a yield hunt
Falling bond yields encouraged investors to embark on a yield hunt with the largest sector moves being into utilities (now only net -11% UW from -27%), telecoms (+10% OW from +4%) and pharma (+17% from +12%). Tech remains the most popular sector at +25% but is sharply down from its 6m high of +46%.

Just curious about those cash balances, as mutual funds elsewhere are "All In", or close to levels just before the 2007 market top. Well, in a mixed environment hedge funds raised gearing levels? Driven by cognitive dissonance?

Puppenhausmuseum Of Basel

Banks Get New Restraints, Historic Refashioning of Rules Aims to Trim Risk-Taking, Limit Future Crises, so the PR starts at WSJ.com last night.

But, boy, the markets take off ... and sell-side analysts are happy, as some banks are soon to pay out even dividends. Are these guys in Basel serious?

At least Puppenhausmuseum in Basel is ... as we have time of several generations to fix it.

Divided On Double-Dip

Nice chart from the credit strategists at Citigroup Global Markets. Click to enlarge, courtesy of Citigroup Global Markets.

I have been taught that bond markets lead equities, but who knows how it is this time? Maximum pain scenario would suggest a FALSE 3-4 days break-out above 1130 area for S&P500 ...

Morgan Stanley On Proclivity To Deflation

Nice table from the economists at Morgan Stanley. Click on table to enlarge, courtesy of Morgan Stanley.

Are there, likely, some problems with it? While focus on ageing is OK, but does not income inequality have similar impact on consumption patterns?

DBS Vickers On The Growth That Came "From Nowhere"

It is still about the "recovery", as DBS Vickers detects it in its latest quarterly:

How can Asia's central banks push ahead with monetary tightening when the Fed is discussing QE2 (additional long-term bond purchases)? More to the point: why isn't trouble in the US and Europe killing Asia's recovery?

The short answer is: the US and Europe did not contribute to it. Or very little anyway. If you only thrown a nickel into the pot, taking it back out again doesn't change much.

Click on the chart to enlarge, courtesy of DBS.

The chart above is a bit of mis-representation of weights, but it does not change the direction ...

Danske Feels Like On A Knife's Edge

Danske is out with quarterly macro publication Global Scenarios, also with short presentation for lazy readers.

Wonders Of Dysfunctional Credit Markets

While I have been keeping an eye on the anti-stressed Europe, the markets got a tiny bit of reminder yesterday.

The economic news-flow from Europe was not very encouraging either this morning, I am quoting here from the "New York Morning Comment" by Nomura, among others:

Germany: Industrial production increased less than expected by 0.1% m-o-m in July (Consensus: 1.0%; Nomura: 0.8%) following a 0.6% decline in June.

Germany: Exports declined 1.5% m-o-m in July (Consensus: 0.0%) after a 3.7% rise in June (revised from 3.8%). The trade surplus narrowed to EUR13.5bn from EUR14.2bn.

Spain: Industrial production rose by 0.5% y-o-y, nsa, wda, in July. On a seasonally adjusted basis, output dropped by 1.1% m-o-m.

Netherlands: Industrial production fell by 0.1% m-o-m in July following a 0.3%decline in June (revised up from -1.2%) - below consensus expectations of +0.8%.

France: The budget deficit widened to EUR93.1bn in July following EUR61.7bn in June, and was broadly in line with government targets.

UK: Industrial production growth was close to expectations in July at 0.3% m-o-m (Consensus: 0.4%; Nomura 0.2%) and manufacturing output also increased by 0.3% m-o-m.

UK: The Halifax house price index rose by 0.2% m-o-m (Consensus and Nomura: -0.5%) and 4.6% y-o-y, 3mma (Consensus: 4.4%; Nomura: 4.3%) in August following a 0.7% (revised from 0.6%) and 4.9% rise, respectively, in July.

Greece: Q2 GDP was revised down to -1.8% q-o-q from -1.5% in the preliminary release.

Portugal: Q2 GDP was revised up to 0.3% q-o-q from 0.2% in the preliminary release.

Then, approximately at a time when Dow Jones Newswires reported the success at Portuguese bond auction:

1014 GMT [Dow Jones] There is no worst time for Portugal to issue debt as risk aversion is sending spreads to new highs against bunds, says Natixis' strategist Jean Francois Robin, after Portugal sold EUR1.039Bln of bonds at sharply higher yields than previously, versus a target range of EUR0.75Bln to EUR1.25Bln. "But the flip side of the coin is a tremendous opportunity for investors to catch some yields when AAA euro sovereign debts are offering almost nothing and no carry. Clearly investors did the latter," he says.

German DAX suddenly catches un-stoppable bid. Click on chart below, courtesy of Thomson Reuters.

Well, but one also sees how others are making the wonders in dysfunctional credit markets, as per The Irish Economy blog:

Today’s story about INBS issuing €4 billion in government-guaranteed debt effectively to itself (i.e. issuing it, then keeping it on the balance sheet to use for repo with the ECB) seems a bit strange. Indeed, normally the ECB doesn’t allow this kind of thing.

It is all well there? Caixa Geral de Depositos, BCP, Espirito Santo Financial Group, Banco BPI?

Another Bottom Call Based On Bearish Sentiment, Now In Japan

From the Japanese strategists at Nomura today:

Signs in QUICK survey that Japanese stocks could bottom: The QUICK monthly stock survey for September (targeting 256 equity managers at securities companies and institutional investors over 31 Aug–2 Sep 2010) was released yesterday (6 September). For the current weighting stance for Japanese stocks, the percentage of respondents selecting “raise slightly” increased m-m (to 16% from 8% in August), but the percentage also rose for “lower slightly” (to 20% from 16%) and “lower substantially” (to 3% from 0%). Meanwhile, the percentage replying “maintain current level” fell sharply, from 75% to 59%. As a result, the weighting stance index for Japanese stocks (Exhibit 1) was below the 50 (50 = maintain current weighting) for a second consecutive month, at 48.4 (August was 48.8).

This is the seventh time since 1995 the index has gone below 50. Such a reading has generally indicated that Japanese stocks are close to bottoming (Exhibit 1). As such, the index falling below 50 appears to be a proxy for a peak in market participant pessimism. We thus think the index’s two consecutive months below 50 could suggest that Japanese stocks are about to bottom out (or that the 31 August close represents a bottom). This is consistent with the TSE’s short-selling ratio (short selling as a percentage of daily trading value) exceeding 30% (another sign that market pessimism may be peaking) on 1–2 September, the first time since 13 March 2009 (the day after TOPIX’s major 2009 bottom on 12 March).

Click on chart to enlarge, courtesy of Nomura.
However, as John Hussman rightly noted, this scene of bearishness, at least in US, was not accompanied with nervousness.

Navigator Of Anchor Themes At SocGen For Choppy Waters

From the team of economists at Societe Generale today, whereby the central scenario of "sputtering recovery" runs a "bit optimistic" versus Albert Edwards, the global strategist at Societe Generale, "SCREAMING that recession is imminent" today.

Click on pictures to enlarge, courtesy of Societe Generale.

Sputtering/stuttering recovery or drift?

Everyone Sees Sour Sentiment To Push Equities Higher?

Also Tobias Levkovich, the US equity strategist at Citigroup Global Markets, scribed last Friday a bullish view on late-year rally, among other factors that may fuel the upside run:

While investors fret about earnings trends, economic uncertainty, unemployment woes, home prices, taxation policies, European austerity and sustained outflows from equity mutual funds, to name a few concerns, several indicators argue for a stock market resurgence including sentiment and valuation indicators. Indeed, our unique Panic/Euphoria Model dipped into “panic” territory three months ago and this predictive measure argues for a 90% chance of market gains within six months.

After just 3 days of a stunning rally, the sentiment may be not that sour anymore. While the market commentators cannot stop cheering about coincident and lagging indicators, the leading indicators via US non-manufacturing ISM survey and ECRI's US WLI do not provide much of rational optimism. Though, European sentiment remains quite resilient so far ... despite anti-stressed credit markets.

This picture came via email and the original source of it is not known to me. But, if prepared accurately, the following chart should not inflate bullish perceptions. Click on chart to enlarge.

Just a game ...

Mother Morgan On China Macro Risk Radar

The economists at Morgan Stanley have drawn a "radar screen" to assess the China's macro risks. Click on chart to enlarge, courtesy of Morgan Stanley.

The recovery of Shanghai Composite Index since July should provide more food for bulls ... especially, if desired.

ECRI Sees More Chances ...

ECRI's Lakshman Achuthan, spoke with Yahoo's Tech Ticker yesterday about US recession risks.

Positive Surprises Of Anti-Stressed Europe

European economic data seem to be surprising positively, at least on surface, though the credit markets cannot get enough of anti-stress, somehow ...


Click on chart to enlarge, courtesy of BNP Paribas.

Global Media Disseminates The Fairytale Of Dragon Blowing Bear-Melting Fire

While the global media focuses on "better or less bad than expected data" today, which is enough for headline investors, but the real reason, in my view, may be different. Sentiment starting from Main-street to Riches, and even to some institutionals, while some segments show total complacency, has deteriorated for some time now, and the critical technicals probably play a much bigger role today for this anticipated short squeeze.

Media has been covering the "bond bubble" for some time now, but the astute James Montier did it yesterday. But read the comments toooooo... The time will come, but it does not feel right yet. Timing is very very difficult and may make you dependant on social benefits ...

It is likely that MMT-ers, like this one, could deal with bond bubbles (hardly pleasant cures in real terms), but they still need some time ... Until that the political gridlock between austerians and Keynesians will pump, very likely, the bubble a bit bigger.