Money Is Not A Panacea

 Extremely short post, I have been busy…

As the Omicron variant makes clear, money is not a panacea.  The only thing that senseless money printing creates is inflation, while it is completely useless against pandemics.  Our politicians and central bankers threw money at the virus, thinking it would solve all problems. They were, and still are, incredibly wrong…..

The pandemic rages on….

And so does inflation….

Curiously, or maybe not, both charts look “spikey” .  

I’m no epidemiologist, but the cure for both conditions looks to me to be the same: slow down. Restrict activities, consume less, remove money from the system. Yes, it will mean a coal in the Christmas stocking, but it’s better than yet another viral explosion.

The Crypto Conundrum - Part One

 I am most certainly not a cryptocurrency expert. This series of posts puts forth some thoughts, musings, opinions and questions. Please feel free to add comments below, they will be very helpful.

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First off, let’s be clear about something: the term “cryptocurrencies” is IMHO a mis-nomer. They are neither crypto nor currencies, at least not yet.

1. Digital network creations can never be entirely anonymous, untraceable or unhackable. Yes, it is very difficult to break into encrypted distributed systems but it is certainly not impossible, as the US Federal law enforcement activities have proven time and again (the same is true of other nations’ actions, state or maybe even privately controlled). Hacking has routinely resulted in stolen tokens, while US  agencies rapidly recovered ransom delivered in crypto. 
2. The most basic attribute of a currency is stability. Given the wild prices swings of cryptos is is obvious that they are not currencies, at least not now. Imagine showing up at the gas pump for a fill-up and having to pay 100 Woofers today instead of 50 last week.
3. Another attribute of a currency is wide public distribution. Crypto ownership is (obviously) not public, but it is estimated to be highly concentrated. This is also made quite obvious by the wide daily price swings.  

Crypto champions and devotees counter these arguments by claiming that it is still early days, every new technology has to go through the early adoption phase. But they miss a huge point: cryptos are not a technology. They are certainly enabled and produced by novel blockchain tech, but they are not a technology in and by themselves. 

So, what are they?

At the moment they are ultra speculative trading sardines, with an added value as criminal money laundering instruments. There is also an element of discounted NPV (net present value) of the prospect that they will eventually become widely adopted as distributed (not centrally controlled) currencies. Again IMHO, this accounts for 90-95% of the present “value” (price) of cryptos.  That’s a huge premium to pay today for a completely uncertain tomorrow.

So, the determining question is this: Will cryptos become real currencies sometime in the foreseeable future? Will they be adopted as a means of universal exchange and a storehouse of value/wealth?

I will examine this in my next post.

The Great Green PermaGrowth Fallacy

Faced with accelerating climate change and species extinction caused by our own activity, we now race to prevent a catastrophe. And how do we propose to run the race? By changing our running shoes, instead of our pacing. Replace coal with natural gas and then replace that with solar energy. Sounds ok - but it really isn’t.

Anyone with even a passing knowledge of the most basic law of the Universe - it being the Second Law of Thermodynamics - understands that creating and maintaining order requires the constant input of energy. The higher the order, the complexity of the system being created and maintained, the higher the amount of energy required. 

The easiest way to express this is that a hot object will always cool unless it is heated by an external source of energy.  There is no such thing as a free lunch.

Most economists, bankers and politicians are unfamiliar with Thermodynamics. I don’t blame them - after all, by the time Rudolf Clausius introduced the concept of entropy in 1865, Adam Smith was already dead for 75 years.  (I wonder what economics/banking would be today if the two had met.) 

So, what we are proposing today  is to grow and maintain ever more complex socioeconomic  systems (Permagrowth), while switching our energy inputs to less “dense” forms like solar, wind and geothermal.  Simplistically put, to go from frying eggs over a gas flame to using a lens to concentrate the sun’s rays. Sure, it can be done, but much more slowly and for fewer eggs. Oh, and don’t forget that we also need to manufacture a lens, which also requires energy. 

Entropy is a bitch: Clausius always trumps Smith - or, more accurately and fairly, Clausius trumps the Fed/Treasury every time. Bankers confuse fiat money with energy, they suppose all it takes to keep Permagrowth going is money.  The current twist is Green Permagrowth vs Black, but the faith in pixelated money remains the same. Once we set a hard physical limit on the use of “cheap” fossil energy,  it does not matter how much money is printed, PermaGrowth is impossible - Green or otherwise. 

(Well… there is an exception, see below 😆😆)

Who Says Money Can’t Be An Energy Source?

Weimar Germany Woman Burns Money For Heat 

The conclusion is that the only way to effectively deal with global warming, climate crisis, species and habitat destruction is to reject the current  PermaGrowth socioeconomic model and move to a cyclical, steady state one.

Such a development will necessarily produce radical changes in fiscal and monetary policies and completely change the way we evaluate stocks, bonds, commodities and derivatives.

Over the next few days I will try to examine and post my views on the the impact of blockchain and cryptocurrencies on a possible transition from the PermaGrowth to a Steady State world.

Add It All Up

 When analysts calculate government debt to GDP ratios they almost always make two mistakes when it comes to the US:

1. They forget/exclude Government Sponsored Enterprises (GSEs) whose debt is either directly or indirectly backed and/or guaranteed by the federal government. The total debt of GNMA, FNMA, etc is $7.7 trillion, or 33% of GDP.
2. They forget/exclude State and local government debt, now at $3.3 trillion, another 14% of GDP

Add all the debt together, and the official, government sector now owes almost $40 trillion, or 174% of GDP - see chart below. Some may say that GSEs aren’t “really” government obligations, but look closely at what happened in 2008-11. That’s when the Federal government bailed out all those GSE mortgage lenders.

Therefore, the US government is now the world’s fifth most indebted, right up there with the likes of Greece, Sudan and Eritrea… but, we continue to whistle past the graveyard.

Naming Names And Taking Numbers…

 In no particular order, these are some of the famous financiers warning that we are in a historic bubble.

Larry Summers

Bill Gross

Henry Kravis

Jeremy Grantham,

 Richard Bernstein, 

Ray Dalio

 Jim Rogers

 They have decades of successful market experience and the billions to prove it.  

Who’s on the other side? Cryptomaniacs, stock meme-ers, MMT-ers and the entire brokerage, fund management  and investment banking industry (not surprising, that). What I find amazing is that the Fed is scrupulously avoiding the issue. Nothing, nada, zilch… not even a Greenspanesque “irrational exuberance”.

The PlayStation Market - Where Are The Regulators?

 A meme-crypto named after the wildly popular Squid Game series soars and collapses in a day, producing billions in losses. 

A staid, plain vanilla car rental company announces earnings and its stock goes ballistic in seconds, then drops back just as fast.

Apart from these being huge red flags of a market gone totally bubble mad, they prove that the very nature of markets has gone from investing, to speculation, to gambling, and now to full-fledged video game mode. I can easily picture young boys and girls sitting in front of trading app screens punching Buy/Sell buttons faster than Mortal Combat. 

Securities markets are institutions supposedly REGULATED by the SEC, FINRA, CFTC, the Fed. On an immediate, hands-on basis, they are also regulated by the exchanges themselves, who can place trading halts on securities when deemed appropriate. All of them are now doing nothing of the sort,  having apparently devolved into bystanders.  

And how about cryptos? Is ANYONE regulating this Wild Wild West phenomenon? Obviously, no one.

The threat of this PlayStation market to the real economy is growing exponentially. Somebody has to step on the brakes. Are there any rational adults left, or is everyone involved under 12?

COP26: China and Russia No Shows

The UN’s COP26 conference is in full swing, but China and Russian leaders have chosen not to attend. Unthinkable, given that Russia is the worlds largest country (by area) and China has the biggest population. But, I’m not surprised… why? See the charts below.

China Is The Biggest Polluter, By Far

China Is The Largest Coal Producer, By Very Far

Russia Is #2 Oil Producer

Russia Is #2 Natural Gas Producer

From the same charts we can deduce that if Trump was still President the US would be a no show too.

But it really does not matter who attends if they do not confront the major issue: Malthus was right!  Or, in my lingo, Permagrowth is the direct cause of climate change, habitat destruction and species extinction - including our own.

Since this is a (mostly) financial blog, the most obvious manifestation of Permagrowth is the explosion of debt/money at exactly the same time as environmental destruction - see chart below. The money/debt/assets bubble may not be the direct cause, but it is the direct facilitator.

This Is An Old Chart - Global Debt Now At $300 Trillion !!

China Enters Stagflation, EU To Follow Very Soon

 According to the latest statistics China is now at or very near stagflation. Industrial production has contracted for the third month in a row while inflation keeps ramping up. The US is (essentially) also in stagflation (see previous posts), while the EU is rapidly heading that way too. Add them up and you get almost 75% of the global GDP…

Unless inflation is stopped in its tracks right now we are in for a very rough time ahead.  With interest rates still extremely low, the real danger will be sovereign bankruptcies when long term bond rates spike up and investors refuse to buy/roll over more debt, even from the US.

The Fed and ECB are in denial, and so are most politicians.  Unlike them, all experienced, long term investors are constantly warning of serious trouble. One of my favorites is Jim Rogers who says the next bear market is just around the corner and will be the worst in his lifetime.

But hey, what does he know compared to the likes of Reddit users who are frothing in the mouth to trade yet another dog meme crypto? Yup, the world has gone mad.. woof woof…

PS There is always a “canary in the coal mine”. In today’s bond market I think the dubious honor goes to the Greek Government 10 year bond (GGB).

Last Friday its yield soared by 30 bp (0.30%) from 1.00% to 1.30%. In ONE DAY… In terms of price in the secondary market, that’s a drop of  3 full points, ie a mark to market loss of 3%.  Think about it: a GGB investor lost in ONE DAY what he will make in interest in THREE YEARS.  

The Canary In The Coal Mine Looks Very Troubled

Inflation Quickly Passing Through To Wages, Plus Beaujolais Nouveau

Yesterday’s report from the Bureau of Labor Statistics (BLS) showed that wage and salary costs in the private sector rose 1.6% for the three months ended in September.  That’s 6.55% annualized, the highest in at least 15 years- see below. When benefits are included, total compensation costs rose by 1.4% or 5.70% annualized.

But hey… let’s all keep chanting the Powell mantra:  “inflation is transitory”. I hear that burning incense may also help.

As luck would have it, yesterday also saw the Eurozone harmonized inflation hit 4.1%, the highest reading since 2008. Predictably, European bond markets had a fit, with 10 year German Bund yields jumping a 14 basis points from -0.20% two days ago to -0.06%. 

The highly indebted and “junky” periphery (aka Italy and Greece) fared even worse, with yields rising 25 and 30 bp respectively.  (1 basis point = 0.01%).

But hey, let’s all sip some seasonal Beaujolais Nouveau and toast Mme. Lagarde. Like incense, it doesn’t help but at least it makes you happy. Or very happy, depending on quantity. Salut..

Home Price Bubble - Again

 The Great Credit Bubble of 2006-08 was inextricably linked to the housing market, which saw prices spike to unsustainable levels. Credit became so widely available and cheap that house “flipping” became so common that even strippers in Florida got into the act. How about now?

Charts speak loudly.

1. House prices have spiked 20% in just one year

2. Houses are now just as unaffordable vs. income as at the top of the 2006-08 bubble.

3.  The reason is simple: the Fed has printed so much money and driven interest rates so low that mortgages are available for a song to anyone who can fog a mirror. Credit conditions are very loose AND interest rates are at record low.

Credit Conditions Very Easy 

ARM Mortgage Rates At Record Low 

Summing up: easy and cheap credit are sending house prices soaring.  BUT - and this is key - the fundamental measure of house pricing, the un-affordability of houses versus household income, is back to all time bubble highs. 

Record high prices, easy credit and near zero interest rates. Yes, we are in a house price bubble.