Musings Report 2018-1 1-6-18 Three Crazy Extremes We Now Accept as "Normal"
You are receiving this email because you are one of the 500+ subscribers/major contributors to www.oftwominds.com.
For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Three Crazy Things We Now Accept as "Normal"
Human habituate very easily to new circumstances, even extreme ones. What we accept as "normal" now may have been considered bizarre, extreme or unstable a few short years ago.
Three economic examples come to mind:
1. Near-zero interest rates. If someone had announced to a room of economists and financial journalists in 2006 that interest rates would be near-zero for the foreseeable future, few would have considered it possible or desirable. Yet now the Federal Reserve and other central banks have kept interest rates/bond yields near-zero for almost nine years.
The Fed has raised rates a mere .75% in three cautious baby-steps over the past few years, clearly fearful of collapsing the "recovery."
What would happen if mortgages returned to their previously "normal" level around 7% from the current 4%? What would happen to auto sales if people with average credit had to pay more than 0% or 1% for a auto loan?
Those in charge of setting rates and yields are clearly fearful that "normalized" interest rates would kill the recovery and the stock bubble.
2. Massive money-printing hasn't generated inflation. In classic economics, massive money-printing (injecting trillions of dollars, yuan, yen and euros into the financial system) would be expected to spark inflation.
As many of us have observed, "official" inflation of less than 2% does not align with "real-world" inflation in big-ticket items such as rent, healthcare and colleg tuition/fees. A more realistic inflation rate is 7%-8% annually, especially in the higher-cost regions of the US.
But setting that aside, there is a puzzling asymmetry between low official inflation and the unprecedented expansion of money supply, debt and monetary stimulus (credit and liquidity). To date, most of this new money appears to be inflating assets rather than the real world. But can this asymmetry continue for another 9 years?
3. Stock markets are soaring but sales and profits are stagnant. Everyone knows central banks are still pumping $200 billion per month into the financial system via purchases of stocks and bonds, and this has been pushing stocks and bonds sharply higher for the past 9 years, with only a few hiccups along the way.
This is pushing valuations out of alignment with traditional metrics of valuing assets such as sales and profits--a process known as "price discovery." In essence, traders and investors have habituated to central banks driving private-sector markets higher, not because the assets are generating more value or profits. but simply as a function of centralized money creation and asset purchases.
All of these extremes generate mal-investment, diminishing returns and perverse incentives for ramping up unproductive and risky speculation, leverage and debt. Yet the central banks have trapped themselves in this risky trajectory because they've pushed the accelerator to the floorboard for 9 years. Any extreme held in place for 9 years has long slipped from "temporary" to permanent.
Participants have now habituated fully to the central banks' extreme stimulus of financial markets, and in a sense they've forgotten how to price assets based on real-world private-sector measures.
How can central banks "retrain" participants while maintaining their extreme policies of stimulus? The only possible answer is: they can't.
Summary of the Blog This Past Week
It's Not About Democracy: Control Fraud Is the Core of our Political System 1/4/18
Why the Financial System Will Break: You Can't "Normalize" Markets that Depend on Extreme Monetary Stimulus 1/3/18
A Few Resolutions for 2018 1/1/18
Best Thing That Happened To Me This Week
It finally rained a bit in Northern California after essentially no rain in December--one of the driest on record.
Market Musings: The Chart of Bitcoin
Can bitcoin be productively charted? In other words, can investors gain any predictive insight from charts of bitcoin?
The TradingView website hosts a great many technicians' charts of bitcoin, but few seem reliably useful as predictive analysis.
For example, in the recent downdraft, dozens of chartists predicted BTC would fall to $8000 or lower. All who predicted this were flatout wrong, as the spike down below $11,000 was the low of the move.
Technical analysts generally hold the view that anything that's traded on an open market can be productively charted. I tend to agree, but some history of what works and doesn't work is required.
Here's one chart of bitcoin anyone can access for free on stockcharts.com ($NYXBT). BTC appears to be following a very conventional retrace/pullback move, having traced out a classic wedge/pennant which has been broken to the upside in a continuation-of-trend move.
At a minimum, if MACD bottoms and makes a bullish cross, then a move back to the $19,000 - $20,000 level is in the cards.
The Bollinger bands are tightening, signaling a major move up or down. Given the other indicators, the move will likely be higher, i.e. a continuation of the bullish trend.
The study of charts may over time yield useful trading tools/signals if we keep track of what indicators seem to work and which ones don't.
From Left Field
Why Are Profit-Making Factories Closing Across England? (via Timothy K.)
Wolf Richter: Momentous Change in US Natural Gas, with Global Impact -- US natural gas exports are impacting global markets (and geopolitical influence)...
The Real Future of Work -- income insecurity and loss of healthcare benefits a major issue...
Wanting Monogamy as 1,946 Men Await My Swipe -- dating sites encourage "consumption" of relationships rather than monogamous bonding....
Colonialism can work – just look at Singapore -- many disagree vehemently, this is very non-PC...
J. D. Alt: The New Poverty (via Timothy K.) -- his views align closely with mine...
The 'chemputer' that could print out any drug -- 3D fabrication of medications could disrupt the pharma cartels by decentralizing sourcing of meds...
Agricultural Commodities ETFs -- ag ETFs so beaten down, it may be productive to start tracking them...
From Territorial to Functional Sovereignty: The Case of Amazon (via Cheryl A.)
"I would rather have questions that can't be answered than answers that can't be questioned." Richard Feynman
Thanks for reading--
charles |
|
