Monday, November 20, 2017

A World of Absurdities - Economic, That Is

One of the economics sites I read regularly is Mauldin Economics, by John Mauldin.  He was recommended to me first by a reader here, and my apologies for not remembering who you are.

John has been preparing for a big conference in Switzerland and this week's email, Bonfire of the Absurdities, is a summary of what he's presenting.  I really recommend you Read The Whole Thing.  As usual, I'm going run a few snippets to whet your appetite.  Mauldin looks at a handful of economic indicators and more or less echoes my observation: there isn't a week that goes by that something doesn't happen to make me say, "the whole world has gone completely FN".  He's a little more polite.

Let's start with a graph a lot of you have already seen: the Federal Reserve bank's assets as a percentage of GDP.
Things went a little wonky there, somewhere around 2008, no?  Over to Mauldin:
Not to put too fine a point on it, but this is bonkers. I understand that we were caught up in an unprecedented crisis back then, and I actually think QE1 was a reasonable and rational response; but QEs 2 and 3 were simply the Fed trying to manipulate the market. The Keynesian Fed economists who were dismissive of Reagan’s trickle-down theory still don’t appear to see the irony in the fact that they applied trickle-down monetary policy in the hope that by giving a boost to asset prices they would create wealth that would trickle down to the bottom 50% of the US population or to Main Street. It didn’t.
In other words, the Fed is as good at seeing the irony of what they do as Antifa.  The really absurd point here is that the Federal Reserve's assets are under 30% of GDP.  The European Central Bank and the Bank of Japan have both grown their balance sheets more than the US has. The Bank of Japan’s balance sheet is almost five times larger in proportion to GDP, and it's still growing.

As long as he's in Switzerland, he needs to show a little of their absurdities, too. The Swiss National Bank (SNB) is now the world’s largest hedge fund.
The SNB owns about $80 billion in US stocks today (June, 2017) and a guesstimated $20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it). 

They have bought roughly $17 billion worth of US stocks so far this year. And they have no formula; they are just trying to manage their currency.

Think about this for a moment: They have about $10,000 in US stocks on their books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.
And they're barely doing it.  If people deposit money in Swiss bonds, they don't earn yield, they pay for the privilege of losing money in Switzerland!  Switzerland is fighting a monstrous battle to keep their currency from going up.  Yet, that's still not the most absurd thing here.
Not coincidentally, European yields are at rock bottom, or actually below that, in negative territory. And what is even more absurd, European high-yield bonds, which in theory should carry much higher rates than US Treasury bonds, actually yield below them. Here’s a chart from old friend Tony Sagami:
Interest rates are supposed to reflect risk. The greater the risk of default, the higher the rate, right? Yet here we see that European small-cap businesses are borrowing more cheaply than the world’s foremost nuclear-armed government can. That, my friends, is absurd.

Understand, the ECB is buying almost every major bond it can justify under its rules, which leaves “smaller” investors fewer choices, so they move to high-yield (junk), driving yields down. Ugh.
The common name for high-yield bonds is "junk bonds", because they have a high risk of default.  Here we find that European junk bonds, which (again) should have the highest yield, are earning less than US Treasuries.  (It doesn't say which term US Treasury, and there are many.  Sorry.)  Does this mean buyers think of the US as junk bonds?  Or do they not make the association and just go where they can get any yield? 

Let me leave you with one other plot to get a feel for the absurdity.  This is the total US stock market cap to GDP.  It is now the second highest - at least in this 46 year plot - second only to the dot com bubble of the late 90s and much higher than the bubble that popped in '08.  Really, one good rally, an optimistic "we love 2017!" run up, could put us at the same levels as the dot com peak or beyond.  I wonder how that's going to work out.     

There's plenty of absurdity left, and lots of stuff to make you go "hmmm".  Go read.


  1. Yes, it's a house of cards. And everyone is 'making money and holding their breath'. I'm building a house in the mountains .

  2. Most of these distortions are indicators of the underlying problem or often the result of attempted bandaid fixes that in turn distorted indicators. But all of the Keynesian attempts to kick that can down the road have simply pushed out an inevitable economic drop off the proverbial cliff into much bigger and scarier inevitable drop into an economic void. It is coming; the big one; the Tsunami of an economic crash. The super volcano of great depressions. All that QE 1, 2 and 3 did was buy time. I hope you used the time well. The piper must be paid. Sooner or later the U.S. economy, Europe's economy and probably the worlds economy will crash with a perfect 10 on the economic logarithmic Richter scale of economic disasters.

  3. You want a real indicator of just how fooked the average Joe is?
    Let's say for round numbers, Joe has 20,000 dollars in a savings account right now.
    Do you know how much interest he is going to make off that 20 grand in one year at the current rates?

    Twenty Dollars.

    I kid you not.
    You can make more money picking up pop cans on the side of the road.

    So what options does Joe have?
    A CD?
    Don't make me laugh.
    Forget the stock market, Bonds are no good either.
    So even if Joe isn't living check to check and has a bit stashed away, he is unable to capitalize on it and inflation is slowly eating it away like rust.

    I am at the point where I am almost looking forward to The Great Crash because I want to see just how far they can push it down the road. I am amazed it hasn't happened already.
    What we are witnessing is unlike anything ever seen before in the history of man and when it finally goes it is going to be SPECTACULAR.
    In the mean time every headline I read is howling about how great everything is right now, because Trump.
    Well Trump ain't the Second Coming and I have a feeling there is a giant bag somewhere that someone is going to stick in his hand here real shortly.
    What can't continue, won't.

    1. The fancy term is Yield Purchasing Power, YPP. Virtually nobody ever talks about it, but I did a piece on it here It's the most obvious place where hyperinflation is visible in the economy right now.

      Someone retiring in 1980 could earn 2/3 of the median income off $100,000 in savings. To earn that today requires over $100 million in savings. In 35 years, the YPP of a 3-month CD fell more than 1,000-fold.

      One thing about Trump is that I've heard him say specifically that working people haven't had an improvement in wages in decades and they're trying to address that. For the last 46 years, wages going up was the trigger to the Fed that there was inflation and they needed to raise interest rates. Can Trump boss the Fed around? We'll see, I guess.

    2. 1980 was the Killer Rabbit era. What were interest rates back then? And what was the rate of inflation? While a person retiring in 1980 could probably do what you claim for THAT year, he would have soon been in the same state as retirees today were it not for RR.

    3. In this case, the original author I got the comparison from might well have been cherry picking his data series. 1979/80 was a pretty unusual time; the world was reeling from going off the gold standard and interest rates were insane, as you know. And this last 9 years has been just as absurd, with a negative real interest rate the whole time.

      So maybe instead of 1000 fold decrease in YPP, it's a few hundred-fold, but it's certainly real, and the central banks are at fault because they own interest rates.

      Both dates point out the absurdity of central bank control, and the wretched state of the world's economies everywhere just reinforces the idea that centrally planned economies don't work.

  4. Would it be OK if I cross-posted this article to There is no fee; I’m simply trying to add more content diversity for our community and I liked what you wrote. I’ll be sure to give you complete credit as the author. If "OK" pleasre let me know via email:


  5. I am in agreement that something is drastically wrong, and there will be a time of great tribulation.
    Conventional investments seem to be either in insane bubble territory, or dismal in their returns. My gut feeling is when this blows up, the only assets with any value remaining will those you can hold in your hand, metaphorically speaking. House, food, land, productive tools, etc.

  6. As the philosophers Blood, Sweat, & Tears noted, "What goes up, must come down."

    Mind the falling economy when it all comes apart.

  7. The blue line on the second graph using the calculation method from 1980 shows consumer inflation averaged about 8% since 1999:

    1.08^18 = 3.996, so the purchasing power of your dollars declined by a factor of 4. This is deliberate policy to deny you the fruits of the industrial and computer revolutions, the material benefits of the technological singularity.