Wednesday, August 17, 2016

Marion Hubbert and Boone Pickens On Oil's Mess

The price of oil is as difficult to predict as it is important to investors' economic outlook.  Books have been written on a correlation between climbs in oil and subsequent recessions so that all you had to do is look for a swift enough climb in oil to know that a recession was soon to follow.  But for every such analyst, there is one who points to weak oil as a sure sign of recession at hand.  Whatever your views, we all know oil is the 800 pound gorilla in the economic china shop.  So when accomplished oil price experts like Daniel Yergin and Boone Pickens speak, investors lean, hand cupped to ear, to listen.

Hubbert's Curve

In the early days of oil in 1956, a Shell geophysicist named Marion Hubbert, a much more obscure expert, developed a math model of oil production.  He was reviled as crazy, almost unpatriotic in the robust American oil business of the 1950s.  But his projection method called for a peak in US production in 1970, after which would be a permanent decline.  And that actually happened:


The red line is Hubbert's math projection made in 1956, and the green line is how it actually turned out.  The above Wikipedia chart is for the lower 48 and doesn't show the large contribution of Alaska in the '80s. But Alaska wasn't even a state in Hubbert's 1956 model.  His math was for conventional oil from naturally pressurized reservoirs (the only kind of oil they knew back then) and it has essentially proven to be correct.

But then, along came shale. This unconventional bonanza has blown the needle far away from Hubbert's curve of physics for conventional reservoirs.  Drilling horizontally in oil laden rock and propping open fissures with sand fracking is a totally different recovery with a whole new set of physics and planet of reserves. This departure from Hubbert's world can be seen very graphically in the US production history above. Two things happened to take us far away from the conventional curve, deepwater oil in the Gulf, which started in earnest in the mid '90s as the above chart shows, and the recent shale revolution, the radical explosion starting in 2009.

So, as Hubbert's projection for a global peak approached in the early 2000s, slightly fewer considered him a lunatic because his US prediction had been so accurate.  His global peak prediction was refined mathematically by Ken Deffeyes, a Shell associate of Hubbert's, as being 2005.  So how did Hubbert's global prediction turn out?  Well, that crazy man was right again:


The peak was 2005 right on the nose, just as Deffeyes pegged it in his 2005 book Beyond Oil
and in his 2001 book Hubbert's Peak: The Impending World Oil Shortage where, according to Amazon's review :
Deffeyes used a slightly more sophisticated version of the Hubbert method to make the global calculations. The numbers pointed to 2003 as the year of peak production, but because estimates of global reserves are inexact, Deffeyes settled on a range from 2004 to 2008
You see varying levels of this "conventional" oil from about 74 mb/d (EIA numbers) to around 84 mb/d depending on how many NGLs (natural gas liquids) and other things are included in "oil".  NGL is from gas production, so purists don't like lumping them in with crude production dynamics.





Here we see a rough breakdown of just what is propping us up from the disasters of peak oil. The two big props are the pale green one and the pink one - that is fracked gas liquids and shale oil (unconventional crude).  If it weren't for the gas shale fracking revolution that came along, natural gas production, along with the associated liquids, which get put into the "oil" totals, would have plummeted long ago.

This difference in conventional crude and total liquids is behind all the arguing over whether peak oil was right or wrong. "Peak total liquids" has not happened yet, and with shale, may not happen for a long time.  Peak conventional crude did happen, and it happened exactly as Hubbert and Deffeyes said. It is also what Boone Pickens has said.  Without the pink prop shown above, we would be put back on Hubbert's curve, and Pickens estimates something like $175 oil would result.  And without the natural gas shale fracking giving us the green prop, oil would probably be even higher, if the economy could stand it.

Boone Pickens On Peak Oil And The Saudis

The two vastly different types of oil source never gets explained very well, and few understand the difference or its immense implications.  This is very evident, for example, in the tempestuous Dec. 23, 2014 CNBC Squawk Box interview with Pickens, right after the sharp collapse in oil, where Joe Kernen calls anyone who still believes in peak oil a nut saying "that was a horrible call".  Pickens responded, "You need to go back and look at what happened to oil production without the United States."  Kernen then goes on about the Malthusian bet on world catastrophe.  Pickens responded, "Yeah, well that's all good bullshit and all  [this cracks Kernen up] ...in 2005, you peaked.  Go back and look at it ... I'm the expert, not you ...what saved you was the shale."  The conversation meanders from there with Kernen complaining that "oil is oil", not understanding much about the oil business. Shale is as if we traveled to a whole new planet and began farming it and adding it to our earth oil that we've been poking a hole in an underground balloon for.

Anyway, all this has abruptly propelled us far away from Hubbert's curve into a world now drowning in oil.



As if all this natural over supply against a weakening global economy wasn't enough of a price killer, we have the price war aspect of oil production as a nasty reality in our world today.  Saudi Arabia, thought of as the swing producer, operates mainly conventional fields with high EROI (net energy and ease of extraction) and they frown on significant competition.  They not only frown on it, they annihilate it.

Some say this is really what happened with the fall of the Soviet Union in the late 1980s.  Reagan's arms race was a real pain for the Soviet economy.  But as the forbes.com article "It's Time To Drive Russia Bankrupt - Again" pointed out:
It wasn't Reagan's massive defense build-up, or his Star Wars program, that drove the Soviet Union to the wall; it was the decline in real oil prices caused by the Reagan/Volker/Greenspan strengthening of the US dollar.


The Saudis rubbed salt into those monetary wounds, because Russia was co-leader in the world's oil production at the time with poor quality fields nowhere near the Saudis' EROI and profit price.  The Saudis gunned production with their better fields to levels beyond prudent oil field physics and flooded the market with oil just below Russia's break-even price - and Russia suffered an economic collapse.  Thus we had the dramatic decline in prices going into the late '90s while Russia's inferior fields were being put out of business.

The Saudis have been aiming that same gunnery at their new enemy, the US shale producers now, as Boones Pickens has often pointed out. In a 4/28/16 article in The Tulsa World titled "T. Boone Pickens calls U.S. oil industry 'dead in the water'."  they said of Pickens:
Since 1980, he recalled in an interview, he has watched oil prices plunge five times worldwide. Four of those times, he said, Saudi Arabia stepped in to cut its oil production, balance the market and bring prices up again. The fifth time — this time — the Saudis kept pumping away, prices stayed low and U.S. companies let their drilling grind to a near-stop. Pickens doesn’t expect them to resume anytime soon ...
The Saudis could be waiting for the destruction of the shale industry before they bring prices back up again. Are they really that cut-throat?  Pickens certainly thinks so.  On the pending public offering of Saudi Aramco stock :
 “It’s a joke,” he said, because stockholders would own stakes in a company still very much subject to Saudi politics. “Who the hell would want to own Saudi Aramco?”
You could, however, make the case that it's mainly the shale explosion that is acting as the swing producer nowadays, not the Saudis. Take a look at this chart:


Here we see that total shale has added 5 mb/d to the world's production whereas the Saudis have been flat since mid 2011, and their market moving excess capacity is thought by Pickens to be only about 1-2 mb/d.  In a price war, are they fighting with a pea-shooter compared to the shale guns?

Well, fighting they are.  And they're putting up a pretty good scrap.


Pea-shooter or not, OPEC is the only one shooting any ammo in this war.  Their lifting costs are only about $15 a barrel, lower than anywhere.  The higher cost US and Russian producers are not trying to keep any lid on prices and aren't trying to drive anyone out of business.  But Aramco is a state run company, meaning that they run the government with their oil profit.  And they need about $80 oil or they must cut services, impose taxes, or dip into their cash reserves of $750 billion built from $100 oil.  In the current price melt, they are burning that reserve at $6 billion a month, a rate that will leave their peashooters empty soon.  So it's a rope-a-dope strategy by everyone against them, hoping they exhaust their arsenal soon and have to live with oil climbing over $60, limited only by real supply and demand in the US/Russia production onslaught.



The Saudis may soon become a more a victim of low oil than a victor.  As was pointed out in an article "Saudis Will Not Destroy The US Shale Industry" at The Telegraph, their temporary ploy can only force the shale properties and technology to change hands, not ever be destroyed.  For all the damage they inflicted on Russian oil in the '90s, Russia is now the world leader in production, outdoing the Saudis.

I have said all that to say this: the price of oil is not controlled by supply and demand equations you can tote up and say price must do this.  It is controlled by aberrant malinvestment cycles gone crazy, geopolitical price war machinations, surprise innovations, and about everything under the sun that any sane investor avoids.  For about 5 brief years from 2003 to 2007, oil pricing was between price wars, economic collapses, and surprise innovations; and Hubbert's curve took firm control as the peaking of conventional ran us way short of oil.  I was fascinated with Hubbert's theory and went long energy in those years.  But ever since it was de-Hubbertized in 2008, I have avoided the whole sector.

Oil simply has way too many layers of unpredictability in it now, many I haven't even mentioned - like Iraq's future flood of the only significant light, sweet fields left unexploited , and the very dangerous net energy problem with shale.  Boone Pickens has a history of making some very good calls on oil, but over the last couple years, he has been way wrong, calling for $80 in early 2015 by the end of that year, and missing big on the high side since then.  I'm not knocking Pickens.  I am a great fan of  US natural gas as a bridge fuel in trucking and the whole Pickens Energy Plan for America.  I was writing on this bridge fuel thing years before he went to Congress with his proposal.  He is on my short list of people I'd like to see as Secretary of Energy, president, or whatever position could enact The Plan.

But I think oil has gotten to be almost uninvestable, and even the best predictors are stumped.  We are in a transition zone.  On the other side will be a stable shale industry, in different hands, and it will be a good investing area again. We aren't there yet.

Adding to all the mess oil has gotten into is the whole banking aspect of it.  As we all know, the shale drillers have borrowed heavily in the NIRP free money years with oil above $55, putting their fortunes in the same boat with a great many banks.  Now with the oil oversupply keeping the price in the range where conventional oil profits but shale doesn't, the Saudis are again showing little mercy on their competition, and are thus at great odds with banking as well this time.  But this isn't 1988, and in this derivative crazed banking world we live in today, if they do to shale what they did to the USSR, we all could be in a heap of trouble.  The Saudis are probably aware that the shale debt craze has put $2 into the ground for every $1 of revenue, and they just have to keep oil below $60 until the shale companies fold up.

We are going to have banking troubles while bankruptcy courts redistribute the valuable shale properties, until the US shale is "restarted" after oil stays high for awhile.  In the above mentioned The Tulsa World article, Pickens was speaking at a gathering of supply-siders, including Art Laffer, Steve Forbes, Larry Kudlow, and some fund managers:
It’ll be hard to start the United States back up,” he said ... They pressed Pickens on how high prices would need to rise to bring U.S. oil rigs back online en masse; he said higher than $40 or $50 a barrel — probably closer to $60.
If we stay in a stable price war, with excess conventional capacity from the likes of the Saudis keeping the shale industry throttled, we will eventually be put back on Hubbert's curve where no excess capacity exists anymore from shale or anybody; and, as Pickens is predicting, prices will then ascend and slowly bring shale back.  This would likely be a gentle process of perhaps many years. We should be so lucky.  If the Saudis' price war and the banking problem induce shock into the financial system, a badly hurt global economy could have a not so gentle effect on oil.

All the aforementioned changing-of-hands of the valuable shale assets may provide some adventurous plays for the brave with some of the assumed prime beneficiaries of such a shuffle of the cards.  That would be the cash rich big oil companies looking to rebalance between conventional and shale assets.  The abrupt shale explosion has them way behind the curve on this.  Some companies to consider there are Exxon Mobil (XOM) Royal Dutch Shell (RDS/A) and ConocoPhillips (PSX).  Conoco in particular is making a "massive wager" on US shale according to a Bloomberg release from a little over a year ago "ConocoPhillips Bets On Shale In Major US Spending Shift".  They are "pledging" to spend 50% more over the next three years, and much of that may be pennies on the dollar if the shale bust continues.

But I think such investment plays would have to be considered as much higher risk than what we normally think of with such names.  We have an unprecedented confluence of unstable, opposing mega forces acting on oil right now.  So my best investment advice with oil is - don't even go there.

Sunday, July 31, 2016

Gold And The Banks

A lot of things are said to drive the gold market, but a good argument can be made that banking health is a major driver, if not the major driver.  I made this point about our current markets in my article "Gold, The New Anti-Commodity, And Derivatives".  After comparing the resurgence of GLD to a few of the usual suspects that gold is supposed to respond to, and finding little or no correlation, I compared gold to the inverse of the financials, and here we do, in fact, find a pretty solid correlation going on right now :


 

In horseshoes, we call this a "leaner," the next best thing to a dead ringer. Here we see that gold has been strongly correlating to the inverse of the financials. It's the banks that gold seems to be mainly concerned with ...
Over the years, there has been a very strong correlation between the big gold moves and bank health. This isn't talked or written about very much as gold is supposed to move opposite the dollar, opposite the stock market, or as a result of interest rate changes.  But if you examine history, you find that the most massive gains in the gold miners tend to happen when very serious trouble is engulfing the banking world.

It certainly was so in the 1930s. As I pointed out in my article "A Study In Crashology", there were a lot of moving parts in the puzzle back then.  Most people think the stock market crash in 1929 was the immediate cause of the Depression.  But this market event was just a big valuation correction of speculation in the Roaring '20s, and just a garden variety recession was going on in the economy.  In fact, we were recovering from this recession when the real trouble started. What happened to cause something more was the involvement of the banks with Wall Street in all this reckless speculation, and the fact that many banks lost so big in the stock crash.  This giant problem led to the Glass-Steagall Act of 1934 that put up a wall between banks and investment - no mingling of depositors' money and speculation.  More than any other factor, this banking illness induced one of the mega bull markets in gold mining.  In historical context, it looks like this:

Looking at the historic gold miner climb "A":

 Here we must use Homestake Mining as our index (since none existed back then) but other giant gold miners such as Dome Mines did a similar thing.  Please note that in the years 1924 to 1929, both the gold miners and the stock market were bulls, which isn't supposed to happen, but it does all the time.  Also note that the huge miner move wasn't some baseless fear contagion without a dime of fundamentals behind it. The above chart has the earnings and dividend payout yearly, and as you can see, these did a monstrous climb as well. But perhaps most noteworthy about this chart is that the horrible stock market crash of 1929 barely caused a ripple in gold mining shares.  It was the approaching bank problems that sent the miners into a much higher gear.

Another bout of serious banking problems hit during the Savings and Loan Crisis of the 1980s. Before this was over, nearly 1 out of  3 Savings and Loans went under at a horrendous bail-out cost.  Despite all the supposed protections built into the system, this speculation mess cost every tax paying American over $1000 chipped in from their own wallets.  This was during a grinding bear market in gold after the 1980 bull market peak, but the gold miners did a spectacular climb at the peak of the bank failures:


There was the stock market crash of October, 1987, but the gold miners got clobbered along with that, and the only other significant thing going on in that year to cause a whopping 100% gain in the XAU miner index in a gold bear market in less than a year was the severe trouble in the banking world.

At the Federal Reserve History web site, the piece "The Banking Panics of 1931-1933" blatantly said that gold responded to the banks:
On September 21, 1931, Great Britain left the gold standard—that is, withdrew its promise to provide a specific amount of gold in exchange for its bank notes (Wicker 1996).  Foreigners became concerned the United States would do the same and began converting their dollar assets to gold. This external drain caused a large reduction in the US gold supply.  At the same time, depositors became concerned about the safety of banks and withdrew currency from their accounts, creating an internal drain on the banking system (Friedman and Schwartz 1963).  Together, these external and internal drains reduced the money supply, deepening the deflation which propagated the depression.


Can such a horrible thing happen again?  Don't we have the FDIC to protect us?  If a mass withdrawal panic were to happen again, the FDIC would cover about the first 1% of failure.  At the leading edge of negative interest and the other bank destroying avant-garde measures is Japan, and there we see home safe sales are soaring.  This is not a good pied piper to be following.



You may have noticed on the above chart of bank failures that a boiling pot of trouble comes along every 36 years, but at the 1944 juncture, just the opposite happened - a virtual disappearance of bank trouble - for 36 years.  What strange thing happened here, and what does it have to do with gold?  Bretton Woods happened and it had everything in the world to do with gold.

This was a conference in July, 1944 in Bretton Woods, New Hampshire, where 730 delegates from  over 40 nations came together because they were all sick of the banking and currency troubles that had beset the nations ever since we strayed from monetary gold and silver starting in the late 1800s.  We created the Federal Reserve System in 1913 thinking we had little need for precious metals in our modern economies.  And we had experienced a world war and a punitive treaty against Germany that resulted in an inflationary destruction of that nation.  This had led to yet another world war.  And in the meantime, we had allowed wanton speculation in the bank world to take depositors' life savings and demean our whole economy into an unnecessary depression.

We fixed all that.  Glass-Steagall was put into effect in the mid '30s to protect our banks from the careless speculators, and Bretton Woods was signed in 1944 to strictly tie the world's finances again to gold. The goal was to prevent competitive currency devaluations and over leveraged Wall Street (vs real economy) investing.  Does this sound familiar ?  By Wikipedia's account,
In the 1920s, international flows of speculative financial capital increased, leading to extremes in balance of payments situations ... Flows of speculative international finance were curtailed [ by Bretton Woods ] by shunting them through and limiting them via central banks. This meant that international flows of investment went into foreign direct investment (FDI) - i.e., construction of factories overseas, rather than international currency manipulation or bond markets
This sounds like all the things that need to be stopped today.  At Bretton Woods, the upshot of their wrangling was that the US dollar was strictly set to convertibility to gold, and the rest of the world's currencies strictly (+ or - 1%) set to the US dollar.  Could such a thing even really work? Well, judge for yourself:

Duh - yeah, I'd say it could work.  It worked until Richard Nixon in 1971 and Bill Clinton in 1999.  President Nixon undid the gold part.  And now the rats have been let back out of their cage and are well on their way to ruining the world again.  In 1971:
A negative balance of payments, growing public debt incurred by the Vietnam War and Great Society programs, and monetary inflation by the Federal Reserve caused the dollar to become increasingly overvalued.  The drain on US gold reserves culminated with the London Gold Pool collapse in March 1968.  By 1970, the U.S. had seen its gold coverage deteriorate from 55% to 22%.  This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.

In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs ... In response, on 15 August 1971, Nixon ..."closed the gold window", making the dollar inconvertible to gold directly, except on the open market.  Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock.
Then, president Clinton undid the Glass-Steagall part.  And we have had one banking crisis after another ever since with the biggest one probably yet to come.

Regarding the historic panorama of bank failures shown above, you may notice that the great gold bull market of the 1970s had no correlating bulge of bank failures.  We can actually explain that in just three words - Richard Mischievous Nixon.  He said he wasn't a crook, but his Watergate lying was just the tip of the ethics iceberg.  He passed himself off in elections as a fiscal conservative, but per the account at Investopia "The Great Inflation of The 1970s":
Nixon ran budget deficits, supported an incomes policy and eventually announced that he was a Keynesian ... John Maynard Keynes was an influential British economist of the 1930s and 1940s. He had advocated revolutionary measures: governments should use countercyclical policies in hard times, running deficits in recessions and depressions. Before Keynes, governments in bad times had generally balanced budgets and waited for malinvestments to liquidate, allowing market forces to bring a recovery.

 "Malinvestment" is the key word David Stockman now uses in describing the unprecedented problems banks face today, where natural market forces have been obliterated.  Stockman was Reagan's Office of Management and Budget (OMB) chief and wrote the recent best seller "The Great Deformation" describing this historic destruction of free market forces.  He greatly helped us get out of Nixon's '70s mess.  Going into the 1972 election, Nixon wanted cheap money no matter what:
President Nixon's primary concern was not dollar holders or deficits or even inflation ... Nixon fired Fed Chairman ... Martin, and installed presidential counselor Arthur Burns as Martin's successor in early 1971.  Although the Fed is supposed to be solely dedicated to money creation policies that promote growth without excessive inflation, Burns was quickly taught the political facts of life.  Nixon wanted cheap money: low interest rates that would promote growth in the short term and make the economy seem strong as voters were casting ballots.
Nixon got his cheap money and the election.  He said "We'll take inflation if necessary, but we can't take unemployment".  We soon had both after he was bounced out of office.  Jeremy Sigel (Stocks For The Long Run author) is quoted as rating this "the greatest failure of American macroeconomic policy" since the Depression.  And although Americans generally think of this dark period as the fault of the OPEC oil shocks, The Wall Street Journal is quoted as saying, "OPEC got all the credit for what the U.S. had mainly done to itself."


So the 1970s saw a great gold bull market, no bulge of bank failures, but all the key things that cause bank failures, dished out by Nixon, were there.  The gold market knew this. The banks, however had just been through the massive strengthening measures of nearly 30 years of Bretton Woods and had withstood the relatively brief onslaught by Nixon after he did the hatchet job on the agreement in 1971.  Thus, no bank failure bulge on the map above.  We are in a far, far different situation today with our banks.

Actually, the actions of Nixon did have their ultimate impact on banking, for it was the destabilized interest rates he caused that were a prime cause of the Savings and Loan Crisis.  It just took about 10 years to boil up.

So will we have a return of the 36 year cycle of banking trouble start to boil again in 2016, 36 years after 1980 and the start of the last banking failure debacle?  We have been papering over banking problems since 2008 with an unprecedented blizzard of measures unhinged from gold.  The gold miners have certainly looked at the bank world this year and clearly do not like what they see there.  As seen above, their market signal has been reliable in the past.  It isn't really a secret that bad energy company loans issued in the aberrant zero interest frenzy of the last several years are a problem right now for banking.  And many are saying it's just a passing energy sector thing, contained, like sub-prime was to be.  But if you dare to peak at a broader picture of this bad loan thing, you see this:



Looking at all loans, we are entering a very typical pattern of a long bottoming of bad loans now sharply ramping up into the recession zone.  But I think the gold market could be looking at something more ominous than this - the out-of-control derivatives books of the web of major banks, especially in Europe.  There is a danger that continued commodity weakness, especially in copper and oil, could bring on another derivative storm, as happened in 2008, only with much more derivatives in a much more unstable environment in interest rates - what 75% of derivatives are based on. We have gone from projecting four interest increases this year to now projecting zero and resorting to helicopter money in the space of less than one year. This is not a stable environment for the $700 trillion derivatives hot potato to be tossed around in.  It is the banks primarily playing this game of hot potato to the detriment of us all.

But as I said in my recent article on Jim Grant's helicopter money call and its relation to gold:
The printing presses can seemingly fix anything forever, but the ultimate in all this may be evident at what Jim Grant referred to above as the leading edge of all this monetary lunacy, Japan.  There we see home safe sales are skyrocketing.  And in another avant-garde corner, we have a recent piece on Italy's banks and who and how to bail them out of their mismanagement and insolvency.  After exploring all the "emergency liquidity" options, the article concluded:
The real threat is if the local population wakes up to the risk of holding their savings in a financial system that is now teetering on the edge, something Renzi [ Italy's prime minister ] himself admitted when he said that he "hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity." Because even if it buys up every bond, loan and stock in the world, the ECB will not be able to fix the public's loss of trust in fractional reserve banking.
Gold and bank troubles are strongly linked, and both appear poised for bull markets.










Thursday, July 28, 2016

The Helicopter Paradigm



Jim Grant made a most  interesting call on the markets back in September.  He is something of a perma-contrarian residing out of the box in his thinking.  According to a recent article  in the Dallas Morning News "Wall Street Stars Look For Truth In Packaging" Jim Grant and his Interest Rate Observer have a "star quality" track record.  Of Will Danoff, editor of the Observer, it said he:
manages Fidelity’s $110 billion Contrafund and has one of the best track records on Wall Street over the last 25 years
So what did Jim say recently that was so interesting?  Clear back in September, 2015, when everyone and their dog was debating the only important topic of the day - how many times and when will the Fed hike rates because the economy is so good on its own now - Grant wrote an article titled "Jim Grant On Helicopter Money And The Comeback Of Gold".  Mind you this was back when gold was still dead, buried, and detested, and very few were buzzing about helicopters.  On the free credit binge of recent years leading to malinvestment and mismanagement, resulting in mass loan troubles resulting in more stimulus needed, he said this:
So it’s seemingly a never ending, circular process of so called stimulus leading to still more stimulus and unconventional ideas leading to radical ideas. I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks.

What do you think this will look like?  They don’t keep those things as a secret. They talk quite openly about "direct monetary funding" which is what Milton Friedman had in mind when he coined the phrase “helicopter money”.  So the next idea is just bypassing the banking system altogether and mailing out checks to the citizens.

Would something like that even work?  All this monetary stimulus does two things in a reciprocal way:  It pushes failure into the future and brings consumption into the present. Providing marginal businesses with very cheap credit is inviting companies that have passed their useful days of their commercial lives to pretending some kind of an afterlife thanks to the subsidies from the central banks.  But capitalism is inherently a dynamic system based on entrepreneurship and to new inventions. It’s a little bit like the forest for the trees: You need life but you also need death.  Without death there is no room for a new generation and what you get is Japan ...
According to Grant, we have arrived at what Marc Faber has been projecting in monetary policy now for the last 15 years, and I've been writing articles about for the last 7 years - something he has been calling "zero hour", where a law of diminishing returns for each new monetary debt dollar added gets lower real economic return, which goes to zero in 2015.  It has happened to the year per Faber's projection 15 years ago! In the September, 2015 article, Grant said:
This is a monetary moment. I think we are looking at the beginning of the world’s reappraisal of the words and deeds of central bankers like Janet Yellen and Mario Draghi.  What we’re waiting for is a sufficient recognition of the monetary disorder.  You see monetary disorder manifested in super low interest rates, in the mispricing of credit broadly and you see it in the escalation of radical monetary nastrums that are floating out of the various central banks and established temples of thought: Negative real rates, negative nominal rates and the idea of helicopter money.  So you need some hedge against things not going according to the script and that makes gold and gold mining equities terrifically interesting now.
"Now" meaning last September, and he was so right.  There are many now saying that the coming helicopter era means a booming stock market again, and this must be the end of gold's upstart bull market.  This is the old teeter totter thinking on gold and the stock market.  If one goes up the other must go down.  I beg to differ.  It's not that simplistic and history proves it. There are many different gold measures over history. You could just look at the gold price, but before 1971 you had a government set gold price and the only investment available was the gold miners. All the miner indices have originated long after 1971 except the Barron's Gold Mining Index BGMI.  So to compare apples to apples, let's look at this index:


Here we see two cases of raging bull stock markets being shaded only by two raging bull gold markets.  The 1960s stock market was glorious, rivaling any period in history.  During this time, gold was set at $35 an ounce, but was highly sought after for currency purposes.  It was becoming more and more of a strain to gold back currency until, finally, Nixon "closed" the gold window and gold was set by market forces. Here was a clear case of the miners strongly leading the metal price. It was a currency thing back then.

Another case of gold bull and stock bull living in harmony was this:


A five year bull market existed from 1924 to 1929 in both stocks and gold miners. The BGMI didn't exist back then, but Homestake Mining was a behemoth that represented what the miners did.  Dome Mines was another giant that was a remarkable performer during those years.  Here again, as FDR confiscated and revalued gold, it was a currency thing.

In the 1990s, the Alan Greenspan Fed made loose money and the "Greenspan put" the modus operandi of the markets, including the housing market.  During 2002 to 2008, as this currency debasement proceeded into a debt crisis, it was again a currency thing.

Now with helicopter money, it looks to be yet another currency thing that will drive gold, and again we see the miners very strongly leading the metal price, just as they did in the above graph going into the banking failure epidemic of the early 1930s.

It seems more likely that, instead of a simplistic teeter totter relation between the stock market and gold, we will see the more historical relation play out.  Jim Grant was spot on with his September call on the turn to helicopters and gold, and that relationship will probably continue.

So we would be "pushing failure into the future" as Jim Grant puts it, but how far into the future?  Well, all kinds of instability develops with all this pushing.  Deutsche Bank is often discussed as the "too systemic to fail" entity.  Doesn't this just guarantee a helicopter bail out, even though it's supposed to go directly to the people?  The people will have to be protected against frozen ATMs won't they?  DB is a bank, and it is just the poster child for all the big banks, and in our digital, derivative laced world, all of our banks. The people will function only if their banks function. The bank stocks, by the way, have sunk far, far below their all time highs, and many critical bank shares are falling fast.

So how far can all this go?  I don't know, but I can't help but consider a simple thought experiment. Picture if you will, the following scene. You are taking your hard earned money to your trusty bank and are greeted with the pretty sign out front that says something like "Yada Yada Bank and Trust".  That's what banking is all about, you know - trust.  When you sign to create your account, the fine print actually says you are giving your money to them as their property to do with as they please. Traditionally, this meant the bank loaning it out and making profits with interest, and giving you back your money, all of it, whenever you say.  In this post Glass-Steagall, negative interest rate age, it doesn't mean that anymore.  It means they are thinking, as they are in that bold frontier in creative socialism, Greece, that a bank's depositors are legally bound to bail a management sinking from derivatives gone awry or whatever other problems crop up from their stupidity. "Bail-in" is the new buzz word for it. They used to call it bank robbery.

So as you stroll past your bank's trust sign, now picture a helicopter chopping the air, and you see that it is unloading an emergency treatment of money to your trusted bank.  This is because the trusted management of your trusted bank has so screwed up that the chopper load is its only way to survive.  As you carry your load past the sign, with the helicopter landing on the roof, you hesitate with your bundle of hard earned money.

The printing presses can seemingly fix anything forever, but the ultimate in all this may be evident at what Jim Grant referred to above as the leading edge of all this monetary lunacy, Japan.  There we see home safe sales are skyrocketing.  And in another avant-garde corner, we have a recent piece on Italy's banks and who and how to bail them out of their mismanagement and insolvency.  After exploring all the paper-over "emergency liquidity" options, the article concluded:
The real threat is if the local population wakes up to the risk of holding their savings in a financial system that is now teetering on the edge, something Renzi [ Italy's prime minister ] himself admitted when he said that he "hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity." Because even if it buys up every bond, loan and stock in the world, the ECB will not be able to fix the public's loss of trust in fractional reserve banking.
A new paradigm may not fix what depositors will think of the helicopters on the roof.

Monday, June 20, 2016

Fractal Condition of Several Key Markets At Mega Turn Points

Recently I wrote an article on gold's fractal dimension showing that it had built to a high level not seen for at least 10 years. Well you may be scratching your head asking "fractal what?" I briefly explained that it is a "high math" way of quantifying any moving object's reversion-to-mean force after it has been in a trendless state for awhile.

For something that can be charted, like a market, there are two dimensions. The fractal dimension at any point is a mathematical summation of something's behavior as either something that can be described with one dimension (a strong, straight-line trend) or by two dimensions (a meandering, chaotic range). Thus the dimension is calculated as being between 1.0 and 2.0 (between one and two dimensions).  We typically just take the decimal portion and refer to it like basis points.  So a fractal dimension of 1.35 is just called "35".  This "line vs chaos" thing in theory happens at all different time scales, minutes, years, what have you, and you have to divide all this rightly for it to mean anything in the scale that's significant to you.  The guiding mantra of all fractals is always "same thing, different scale". 

This also applies to the geometrical rescaling and repeating that markets tend to do.  Back in early February, I wrote an article, "Gold's Bull/Bear Status" on gold's apparent "new" bull market, which is likely just a repetition of a rescaled, typical, and oft repeated bull market fractal that is really all one bull market

Anyway, enough math.  After looking at gold, and seeing that it currently has a very unusual fractal condition, I looked at several other key markets and found that there is a similar fractal abnormality in them as well. First, let's look again at gold: (click on image to view)

As the graph shows, gold is currently at 55, highest in 10 plus years, presaging a very strong trend coming, either up or down.

Gold is linked to many other markets, so let's take a look at the US dollar with this measure:

"Historically unstable" would be a good description of the dollar's fractal behavior since the 2014 power move up and subsequent chaotic range. The peg-to-peg gyration from 30 to 60 is very unusual for a major index, especially a supposedly stable currency, even on the weekly scale as this fractal dimensioning is calculated.

Of course gold is also supposed to be an inverse play to the stock market, although I beg to differ with that take as there have been extended periods with both rising gold and stocks, with 2002 to 2007 being a prime example.  But historically, and especially lately, gold is inversely related.  So let's look at stocks via the Russell 2000, because it is a broad stock market and it is a leading group. Let's calculate some fractal dimensions:

Amazingly, we find that the stock market is also jam packed with the highest fractal energy level in over 10 years.  But just from this, we don't really know which way it wants to go, up or down, from looking at these graphs as they just show its fractal condition.  Is there something that we could check that could be more suggestive of the direction ? 

Consider copper.  "Every bull market has a copper top" is ancient wisdom, noting that copper puts in a top somewhere in the late stages of a bull.  And it is referred to as Dr. Copper because it has a PhD in economics.  It did indeed peak clear back in 2011 before the transports, European banks or any other leader.  Copper has put in attempts at bottoming ranges amidst a pronounced decline, and recently it has attracted attention to the $2.00 level as a major line in the sand.

There is the technical read where $2.00 is a Fibonacci level.  But then there is the basic fact that the world's biggest trafficker in dangerous derivatives, Deutsche Bank, is highly levered to Glencore, and Glencore is very highly levered to copper staying above $2.00 a pound.  An article, from Business Insider recently explained "Barclays: Glencore Is In Big Trouble If Copper Gets $0.30 Cheaper".  Copper was $2.34 at the time. The article states at the top:
Glencore is a strange hybrid company, both a commodities trader and a mining company, and it has a complicated balance sheet loaded up with different kinds of debt.  There are a lot of different ways to analyze the company but perhaps the best way to think of it is like a bank that's hitting a crisis, like Lehman Brothers ... if the price of copper falls below $2/lb, you begin to get some seriously sweaty palms in Glencore's finance department
If this level gives way, it will be a serious debt problem with the banking system.  And because $2.00 is also a psychological level, breached only in the March, 2009 and January, 2016 market debacles, it would also involve a confidence shock to all the other markets.  In fractal terms, this is how copper looks now:

Each of the ranges in the decline where the fractal dimension went to over 50 resulted in a sharp collapse downward.  The $2.00 per pound line in the sand is right at the red arrow I've drawn illustrating the current range.  And currently we have copper at a fractal dimension of 55, the highest of the entire decline, strongly suggesting another sharp drop, this time through the $2.00 barrier.  Of course, the direction could be up from here, but there is a very strong primary trend at work with copper, so the more likely outcome of the fractal situation is a continuation of this primary trend. It's showing no signs of reversal.

Oil is in a similar but much less profound state of weakness.  It went to an extreme fractal dimension of 60 (monthly) in mid 2014 with oil seemingly stable at around $105.  The massive move to $45 in just 6 months that followed sent the fractal dimension to below 40 in a flash.  On the weekly scale, the fractal dimension went to 52 in mid 2015 with oil steady at $60, went back down to 30 as oil plummeted to $28, and is swiftly going back up as oil struggles in the $40s.  It is a similar plateau and plummet progression as copper, but not nearly as fractally strong, and with the primary down trend in question as oil is trading well above its 200 day moving average.

But there is yet another market index with a once-in-10 year fractal event going on where the direction is probably more clear.  Let's take a look at the VIX:

The fractal dimension reacted strongly to the 2008 event with a big build to 53, then a big dissipation clear down to 34.  It didn't seem to react as strongly to the 2011 Greece scare, as if it knew it was just a passing cry of "wolf".  But it has again gone to an extreme level, being violently pegged at 60 for some time now.  So there would seem to be an extremely large move coming. But if it were down, it would be to an absurd VIX level of around 10 or less. 

Not that this hasn't happened before.  We were cruising into 2007 up until March with the VIX at 10-12 before hardly anyone was worried about housing, or anything.  But in our day, this would imply that stock markets will sudden go to a PE of 30, or an unprecedented burst of earnings will suddenly materialize from a weak economy seemingly beyond the resuscitation of monetary policy, the rising debt defaults will suddenly stop from the mountain of shaky loans, interest rates will "normalize", the lion shall lie down with the lamb, and pigs will fly.

It may not be just your imagination that the global economy, markets, and interest rates are going into some kind of twilight zone. The cold science of fractal analysis backs you up on that.


The collective fractal wisdom is saying buckle your seat belts, and the VIX is saying a big move will either be another big decline in stocks or a sudden trip to nirvana. I guess we could be going to nirvana, but until the evidence is convincing, it may be wise to make some preparation the other way.

If you would like more information on the fractal dimension in markets, you can read the works of Benoit Mandelbrot, who discovered and wrote about this phenomena in all areas of science. He coined the label "fractal" and founded the Chaos Theory approach to analyzing markets.  His book The (Mis)Behavior of Markets has been called "the deepest and most realistic finance book ever published".  There are a few product offerings that give you an FDI (fractal dimension index or indicator) along with the RSI and other technical indicators. One is from QUANTSHARE  Trading
Software.  If you are a programmer, there is code written for this calculation by AmiBroker and others.  You can also use someone's code at MetaStock with their Indicator Builder feature.

A word of caution about the FDI - there is no one formula for calculating it from Mandelbrot or anyone. It is a math concept and, for use with the markets, it is only as good as the talent of the writer of the program.  And I have found that, when using one of these, it takes a lot of practice to use effectively.  You have to learn to think like the algorithm, learn the different scales it calculates in, and make it play nice with the other good indicators.  Fractal thinking is a little warped relative to conventional chart reading.



Monday, June 6, 2016

Gold's Direction - The State of the Trend vs Wave Countng

If you pay much attention to the wave analysis, Fibonacci, Elliot, what have you, the next significant move in gold is surely down to $1150ish.  You can sample some of what these types are saying now herehere, and here.  I am a kindred spirit with the wave people in that I am mostly a technical analyst. The chicken scratching means all the world to me.  But the fib levels and other cycling methods usually don't interest me much.  But when there seems to be a lot of these practitioners saying the same thing - well, you ignore them at your own peril.

There seems to be a difference of opinion now on gold between trend analysis and the wave counting.
I have found that one of the most consistent means of looking at the health of a trend is simply by moving averages.  Of course you've probably heard of the "golden cross" or "death cross" when there is a crossing of the 50 day moving average with the 200 day, either up or down.  But one good way of seeing if a trend is intact or changing is by looking at what I call MAPS - Moving Average Pair Support.  This is the 140 day ema (exponential moving average) compared with the 200 day ema.  It is the best divider I know of between a bear and a bull market.

Major market averages typically obey the MAPS division pretty well, but gold in particular obeys it very consistently.  Let's look at how gold has behaved in its bull/bear transitions since the late '90s by viewing them with MAPS: (click on images to enlarge)

Here we see that the moving average pair was down-sloping and acting as resistance in the bear market, then a violent breaking out above MAPS followed by a cross between the moving averages.  From then on, MAPS acted very consistently as support in the new bull market.  There was something of a breakdown of this in early 2003 as the MAPS slope switched to negative and gold went well below this negative slope.  But if you will recall, there was a lot of unusual stuff going on in the world at the time.  The US was getting ready to invade Iraq, which we thought was chock full of bio-weapons, and gold went on a tear, bending the moving averages sharply up.  Then the war was quickly won, and gold overshot a bent MAPS to the downside.

The second bear/bull transition was 2009:

The Financial Crisis of 2008 put gold into a one year decline.  This changed with a MAPS cross, after which the MAPS support was consistently obeyed for years.  Which brings us to the present:

MAPS has switched from resistance in the four year bear market, to a cross, and now to support in a new bull.  If past MAPS behavior is any guide, the persistent obedience gold has with it has begun a new chapter and the severe bounce we saw on Friday smack on the MAPS bound will probably wind its way up to new post cross highs. The cycling move to the mid $1100s would be well below MAPS, hence the difference of opinion between the state of the trend and the cycling.

If gold does in fact go to around $1150, the cycles have it there for just a month or less before flying back into the bull climb. So is it worth trying to trade a portfolio around this short term movement?  That depends on your commissions, taxes, your tolerance for aggravation, and whether you own mostly gold or the miners.  If you have a line up of quality miners (not ETFs) they can be more independent of the short term gold price than you may think, being moved by positive company developments while you have them traded to the sidelines timing a gold price blip:

As this chart shows, over the month of May, we saw a $100 move down in gold, but trying to trade a gold miner portfolio around this would have been very dicey.  So if we go another $50 down to the $1150 level, will that trading turn out any better?  Maybe, who knows.  The miners, especially South Africans, led the turn at the start of the year, and they seem to be strongly leading now.  It may be advisable to just watch gold's behavior on this bounce off  MAPS, and if it clearly weakens below it, maybe take some profits here and there.

Saturday, May 28, 2016

The Fed Is Entering A New Bull Market In Confusion

The Federal Reserve these days seems to want to focus on employment as a reason to justify rate normalization, hinting just this week about an "active" June meeting coming up.  Of course, there are many reasons put forth to dismiss the reported numbers as being phony as a three dollar bill, with Shadowstats reporting a real unemployment rate at around 23%. 

There are many variations of how to track the "unemployed", but according to founder John Williams, there has been a migration in headline reporting away from those who quit looking for jobs and the "marginally attached" workers who are the part time job holders, who can be almost migrant workers - like the farm workers the "nonfarm payroll employment" numbers are supposed to factor out.  Williams puts out stats that reflect more the days of yore (pre '80s) when you had a job if you were loyally attached full time to a company and expected to retire from there.  The BLS government reporting has an unemployment measure where they include part time (U-6) which is much higher than headline, but Williams prefers "the U-6 rate as it was calculated until December 1993" according to the Wikipedia report on his methods.  In the '90s, he claims, some fudging in the sampling took place to deemphasize the inner cities.

But let's take the government reporting at its word for a moment and view this current employment recovery in the context of past employment recoveries from past recessions, apples to apples: (click on images to enlarge)


This chart is from Calculated Risk per a 6/25/15 update comparing the 2001 recession's recovery with our current jobs recovery.  It shows that there seems to be some growing problem with each subsequent employment recovery that slows it down from what a normal downturn and recovery in the economy should look like.  What has been growing in recent decades with regard to economic downturns?  I'll give you three hints - "F" "E" "D" - and its middle initial is Federal Reserve Board.

What's the problem with these ever slowing recoveries?  With our high-powered Fed, now more high-powered than ever, you would think we could snuff out a nagging problem like this.  But maybe that's just the problem.  Our Fed has been busy snuffing out problems for so long that it has created a problem that can't be snuffed out - the mountain of debt left over from all the snuffing:


If you compare the above charts, you can see that the sharply growing employment lag back to normal in each recession recovery from 1980 onward in chronological order correlates well with the sharply growing debt level.  As we attempt to normalize from our last recession, we appear to be going up against some kind of wall with real employment as measured by Shadowstats actually  climbing even as the Fed frantically mashes its machinery into a screaming over-heated condition.

We hear a lot about all the Fed's largess going to repair the mortgage ravaged balance sheets of banks, making them hesitant to lend. But the mortgage ravaging was the left-over of the Fed's previous snuffing project, loose money home ownership. I guess these repairs get to be a bigger job each time.

For all the trouble the Fed's debt creation causes, we are getting less and less bang for the debt dollar as the decades roll by:




This Marc Faber chart formulated 15 years ago shows the diminishing positive effect of each debt dollar on GDP growth.  Clear back then, he projected "zero hour" - when piling on new monetary debt gets us nothing but pathetic real economic growth.  This was projected to come at around the year 2015.   Fifteen years ago, few could find fault with the wonderful help from the Fed's activity.  Here in 2015ville the feeling is quite different.  This out-of-control debt dynamic is nothing new in history.  A fascinating article over at Zerohedge points out the math of debt creation vs the math of economic growth and how previous civilizations have had to deal with this diminishing return on debt path.  We may be approaching such a point now in America.

What we need to normalize isn't interest rates, that appears to be impossible now.  What we need to normalize is the economic cycle, where blundering managements have their properties taken away from them and handed over to whole new teams in bankruptcy courts.  Jim Rogers has been saying this for a long time, and he is finding lots of company these days.  We need to stop subsidizing incompetence.  Capitalism can't work this way.  Bankruptcy and banishment of the foolish was the way it worked for hundreds of years before the Fed, and no sword of Damocles debt burden swept over the world.  It was just isolated countries going through the debt binge/bust exercise with limited global collateral damage. Now the eight major central banks have extended this to the global village.


The Fed is talking higher interest rates to cool down this overheating economy while we suffer at nano% growth with virtually every reliable lead indicator pointing down:

  • The ECRI Weekly Lead Index chart
  • The transports
  • The small caps
  • The banks, especially Europe
  • Aggregate corporate SPX revenue
  • Copper 
And there are more, but you don't have to look very far beyond the dismal fact that 20% of Americans are on food stamps and similar aid, up 25% since 2004, and most are living paycheck to paycheck - the worst real economy since the Depression.  The Fed is confusing a lot of investors, raising rates against this backdrop.

In case you haven't noticed, there is a growing resentment against the Fed's business as usual.  The Tea Party this time was a revolt not against England's meddling with our colonies, but against another foreign entity meddling with our freedoms - the Federal Reserve System.   I always used to think Jim Rogers' call for abolishing the Fed to be a little extreme.  Now I see a poll out from 2010   with the stunning title "More Than Half Of Americans Want The Fed Reined In Or Abolished". 

Since then, this feeling has only grown with several recent presidential candidates, including one still in the race right now, calling for public disclosure of full FOMC transcripts within six months, not the secretive five years now being done.  This current candidate claims that if we had made this change in the early 2000s, Americans would have been dismayed by the housing bubble well in advance of the financial crisis, perhaps in time to avert it.  I won't say who this candidate is because I am Disenchanted Voter and I do not approve of their message.  

This same person, by the way, is the only serious candidate for the presidency ever to advocate reinstating Glass-Steagall.  This banking run inspired safeguard from the 1930s would put a serious crimp in the bankers' dangerous toying with depositors' money that is returning to the scene of the crime today.

One thing is certain, the Fed is not viewed the same as in years past.  Most Americans don't want too-big-to-fail anymore, and they don't want too-big-to-bail either.  The Fed model has run into the ditch, and we may not be too excited about pulling it back onto the road.

This is raising chatter about just bypassing all the Fed's complication and debt creation and resorting to helicopter money - just printing money supply and mailing it to each citizen - at the risk of instability and inflation. This radical move would be an embarrassing admission of failure of the Fed.

Taking all the federal debt created by measures of the Fed over the last 5 years of economic resuscitation and dividing it by the number of households in the US, you get some $14900 per household.  The proceeds were given to Wall Streeters. They bought Mercedes, yachts, Rolexes, and stocks with it. That temporarily benefited the makers of the yachts, and the market of course, and then we have the same old zero growth economy suffocating in taxes to pay for all the central planning.

If the helicopter changes its targeting away from the 1% to a direct, debtless gift to the 99%, the $14900 would be spent on bars, casinos, cigarettes, roller derbies, and vacations to Las Vegas. Studies noted by the Wikipedia account  have found that after the last episode of direct check mailing from the government to fix the economy, the January, 2008 stimulus checks, consumer spending was goosed by 3.5%.  One study noted that almost a third of that, 1.1% apparently went to increased emergency room visits for alcohol and narcotics related issues.  It is unclear exactly how much of the boost went to finance bad habits.  And it did wonders to avert a recession, didn't it? A new helicopter blast would temporarily benefit Joe Six Pack's lifestyle, and then we would again have the same old zero growth economy suffocating in taxes to pay for all this brilliant central planning.

If you look at a historical chart of what the helicopter charity is supposed to save, personal consumer spending, you find that it really doesn't need much saving:


In past recessions, even before the Fed's almighty hand was so dominate, personal spending pretty much went on as before, with or without destabilizing debt creation or currency debasement.  That's simply because the vast majority of people spend most of their money on the things they have to have - rent, soap, and electricity, which are typically going up no matter how the economy is doing.  In a weak economy, a graph like the one above can just be a reflection of how fast the average American is becoming poorer.
 
All the above mentioned federal debt creation of $14900 per household from all the extreme, convoluted monetary measures of the last five years, by far and away the biggest in history, amounts to about 3.5% of all annual personal spending - the same as the spending boost in early 2008.  After the foolish waste, it apparently doesn't amount to much of a lasting economy saver.  It didn't in 2008, and it probably won't again.


If you want a good, clear, scientific explanation of all this, I refer you to something just out this month at  A Scientific Economic Paradigm Project  (asepp.com)  called "Helicopter Money In Operation".  They point out that the only thing modern about it is the reference to a helicopter coined by Milton Friedman:
The new idea to avoid increasing government debt, which is actually centuries old, is simply to create helicopter money. The idea is to create spending money (“out of thin air”) and freely distribute it to consumers without at the same time creating government debt or future debt servicing obligations. This idea of printing money and spending it without future obligations is as old as paper money itself. Helicopter money only sounds new because flying helicopters around has been possible for less than one hundred years
They point out that going clear back to the Yuan Dynasty of the 1300s, many governments have utilized this. They state that,  "All past fiat currencies were abandoned eventually due to hyperinflation caused by helicopter money".  We are in an accelerating dash to that conclusion now in AmericaIn essence, we have already been doing helicopter money for years:
... QE is defined as the central bank printing money to buy private or public debt securities, a procedure also known as debt monetization. While QE injects base money as liquidity into the economy and substantially expands the balance sheet of the central bank with debt securities, the intention always has been to retract the liquidity later by selling those securities back into a stronger economy, particularly through repurchase agreements (Repos). But several years after the initial QE in 2009, central bank balance sheets remain distended and growing.
Should the government debt sit permanently on the central bank’s balance sheet, then it is de facto MFFP or helicopter money because government spending has been financed by printing money ... Another way to see that the central bank’s government debt is helicopter money is to note that in theory, if not in practice, the US Federal Reserve can cancel or write-down to zero the US Treasury securities it has purchased. It would be a “debt jubilee” of the government to itself. ... A “debt jubilee” would make it obvious that the US government is printing money purely and simply.
But it's really missing the point to argue over what to do with all the debt.  The David Stockman point about The Great Deformation (the title of his book) in Debt World resulting from years of interest free money certainly applies to the problem in general.  But as for the federal chopper money, whether financed or free, what government managed money does is wreck the economic cycle:
At the risk of over simplification, we conclude that government budget deficit spending and helicopter money will not work because they increase consumption and inflation, without increasing economic production. It is an enduring Keynesian fallacy that stimulating consumer demand leads to higher economic growth
They point to IMF data that show the clear inverse relation between government over meddling and poor economies, not just in the US but globally:


I have added the green line in the global map as my fit of the data - running from Singapore (where Jim Rogers fled to) on down to the hero of the socialists, Greece. 

What government needs to give a helping hand to is the business owner, instead of doing everything they can to destroy them. You have to wonder what kind of confidence build would transpire if the Fed radically turns from interest rate normalization this June to the extreme check mailing of the dark past.  In 2008, those checks were a message from our government saying, "the economy is in deep trouble and we don't know what to do".  Now after many years of complicated monetary Fed maneuvers, if they do any check mailing again, the message would be, "We give up. We are clueless as to how to really fix the economy".  All the confidence based activity  (hiring, investing, taking on loans, planning of all sorts) could be very badly influenced.  A new bull market in confusion would surely be underway.

Sunday, May 15, 2016

The New Socialism vs Bull And Bear Markets in History

Complaining about our presidents in the US of A is maybe second only to baseball as our national pass-time.   So allow me to indulge in a rant.  I want to take a somewhat spiteful look at the financial market history of our presidents since John Kennedy - an era that I think of as a Comedy of Errors, one of the Bard's great plays.   But it isn't so funny.  Then we will look at our upcoming election in the light of all this.



John Kennedy gave us a free market administration, with low taxes and a business friendly slant.  He felt that the tax and regulation burden on business was an economy killer.  His policies extended the great bull market from the late 1940s to 1966, the post depression recovery.  Perhaps his most famous wisdom was "Ask not what your country can do for you.  Ask what you can do for your country". This saying has a lot of significance in our present heated debate over what our government should be doing for our mess as opposed to removing over-taxing, over-regulation, and other short-term government fixes so that individual businesses can do their thing for our country.  It would have been a good Tea Party slogan had it not already been used by Kennedy.

Unfortunately, Kennedy's VP didn't have his partner's key wisdom very near to his heart.  Lyndon Johnson was probably best known for his Great Society programs, which were an over-done version of some of Kennedy's initiatives to help the poor.  Under Johnson, they became big government helping hands in a War On Poverty, as if it were government's job to regulate the economic status of individuals.  Some of these things survive to this day, like Medicare, and are a big help.  But many were bureaucratic boondoggles - and all began to be a tax problem.  By the time LBJ left office in 1968, the great secular bear market of 1966-1982 had begun.  You can't blame that whole bear market on one president, but an age of asking what your country can do for you had begun.

Then came Nixon.  A normal paper/hard asset cycle turn had begun away from paper investment and to hard assets (commodities).  The turn away from the 20 year stock bull market to the 16 year commodity bull market that began in 1966 was perhaps triggered, or at least abetted, by the bad business policy that came after John Kennedy.  Economy friendly government seems to have died with JFK's murder in 1963.  The commodity bull market had inflation running at around 4% in Nixon's time.   His reaction? - wage and price controls.  Was he a student of the Soviet Union?  This socialist intervention was a dismal failure.  It was a government engineered fix to a government engineered problem.  Sound familiar?  The economy truly went into the ravine under his socialist guidance.  And he took us off the gold standard in 1971 for good measure.  This was to facilitate the government's "helping" hands and loosen up its wrist for the dollar's printing press to follow.  By the time Nixon left office in 1974, the stock market had lost about 50%.  He was bounced out of office for lying before he could do any more damage.

Then came Ford and Carter.  Ford served only briefly and sadly, Carter was a damper on the economy.  His forte was, and is to this day, international peace negotiation.  He put together the Camp David Accords easing Mid-East problems for quite awhile.  But on the economy, he seemed to want to continue the post Kennedy legacy of bigger government, bigger taxes, and more departments (he added two right off the bat) and was the first bail-out president when he bailed out Chrysler in 1979.  Before Obama-care, there was "Carter-care", a government-run health-care system that went nowhere in Congress.  He created the massive Superfund to clean up chemicals in the ground wherever they could be found.  If there was a problem with the economy, government could fix it.

All of this string of socialist presidents, Johnson, Nixon, Ford, and Carter spanned the 15 years of the great secular bear market in stocks from 1966 to 1982, which saw the Dow unable to break 1000 and lose a lot of ground to stagflation. Then came the Reagan Revolution.  And it was just that - a very fundamental change in government, the first real change since Kennedy died.  Whereas LBJ declared war on poverty, Reagan declared war on big government.  Many presidents' worth of government helping hands had the Reagan campaign's "misery index" at such an unbearable high that he was swept into office in one of the most one-sided elections in history.  Reagan declared war on big government and big spending and was the first real business friendly president in 20 years.  And the markets picked up on it, sending us roaring into a secular bull stock market and economic growth.

If you look at a history of US budget deficits and surpluses, you can see this changing tide of socialism playing out:


Detractors of Reagan like to point at the continuing deficits of 1981-1989, Reagan's time in office, as if the preceding stagflation trend had done any better.  But as this article points out, Reagan had to do massive tax cuts, win both the war on inflation and the Soviet Union, before the economic boom finally put surpluses back on the board.

The next chain of presidencies, when you think about it, was 5 terms covering 3 men and 20 years. They all pretty much sought to continue the Revolution. The Clinton terms in the middle wound up being free market and business friendly, not to mention, with the help of a good economy, budget balancing.  Clinton, either by the mandate of the mid-term elections or by a change of philosophy, or a combination of both, put together a pretty fair economic team by the time he left office.

But in the biggest socialism blight ever, we had a banana republic regime of central bankers imposing the greatest mountain of debt of all time on all of us.  All the presidents occupying the White House from 1981 to 2008 turned a blind eye to this fifth column as "market stuff" that they didn't need to worry about.  A new tyrant had taken over the bull/bear cycle, and the 1982-2000 secular bull was killed not by over-interventionist presidential socialism, but by financial weapons of mass destruction.

With Bush II and Obama, we have gone back to the post-Kennedy and pre-Reagan socialist world. Bush did not exactly have a revolutionary, business friendly congress, and Obama would confiscate every private business in the land if he could get away with it.  A secular bear market in stocks and all non-debt fueled paper assets began in the 2000s.  Robust economic growth now seems to be a thing of the past.  Obama is responding to these problems with the socialism of Nixon, and the government helping hands of LBJ and Carter.

As the over arching socialism of central bankers puts debt and currency issues front and center, the old fashioned president/economy relationship is fading.  The "socialist" Bernie Sanders is the only major US presidential candidate I know of to advocate reinstating Glass-Steagall.  This was the safeguard necessitated by Depression banking collapses that barred banking fools from gambling with depositors accounts in stocks or anything but the business forming loans they had been doing before the Roaring 1920s led them astray. 

We had many decades of banking peace after this 1933 Act.  Then came the banker inspired repeal of Glass-Steagall in the roaring 1999, and we have had one financial crisis after another ever since.  Fully reinstating Glass-Steagall is an issue in the election as detailed in an article at NerdWallet "Glass-Steagall Act: 1933 Law Stirs 2016 Presidential Race". Sanders' reinstatement would take away the $20 + trillion of speculation toys (all our bank accounts) from big banking.  But even this would perhaps be too little too late.  The point to consider is this: the era of the power of the president over our financial cycles has ended.  Getting it back may involve more radical upheaval than a US president can muster.

We would have to have a Reagan Revolution in every major country in the world, but even that would not solve the massive delevering cycle and global debt resolution problems we now must endure.  This problem did not exist in 1982.  So the unruly Trump/Sanders hoards are now a budding revolution not so much against big government, but against the new socialism of big "Wall Street" - the perversion of what free market capitalism used to be.  Main Street is becoming incensed by it, and this election campaign is showing it.