Interest Rates & the Collapse of Public Confidence
QUESTION: If we truly are a moving to a cashless society as is evident, and that is massively deflationary, which I agree with, wouldn’t that drive govt. yields LOWER? How do you reconcile a sovereign debt crisis and rising yields with a massive slowdown in inflation and growth that these misguided policies are driving us towards? Given all the cash out there looking for stores of value (like the $170mm Picasso), wouldn’t they just park it into government bonds if there is a massive slowdown of both the velocity of money and economic growth? Or perhaps we see some sovereign yields like in Europe spike while others like the US go sharply lower based on the cap flows? Although that wouldn’t match your prediction that ALL sovereign yields will rise together.
JL
ANSWER: This is the complexity that will twist many people’s minds. All of what you say is logical under NORMAL conditions. People park in government bonds when they distrust the private sector. But what happens when they distrust government? The tables reverse and the dealer is now the people.
It is always a matter of confidence. When capital loses confidence in government, it flees to the private sector but you have to understand at that point it is not about profit – it is about survival. At the peak of the crisis in 2009, rates on government short-term paper went negative. People were willing to pay for safety. The $170 million Picasso is by no means someone buying expecting to make a profit. They are parking money.
Yields will rise as we just saw in the Bunds as capital is shifting from long to short end. But then with the first crack in government debt, capital will look around and ask who is next. Read Herbert Hoover’s Memoirs 1931 Chapter and look at what he describes is the movement of capital that is the same way it moved in 2010. Look at the difference between corporate and government bonds during the Depression. Granted, the US did not default, but it did devalue the dollar in 1934. That is a reduction in the value of an outstanding bond so it is a partial default. Capital shifted to the private sector after the first fake out to the upside side in rates with the Sovereign Debt Crisis in 1931. As cities in the US began to default, you can see that the premium on corporate paper over government dropped sharply illustrating that smart money figured out the problem was government despite what the press was reporting.
As capital withdraws from the public sector (both federal & state/local worldwide), that will drive rates higher. The lower rates are setting in motion a massive collapse in pensions and the elderly cannot survive off of their savings. Moreover, the Fed will be compelled to raise rates if the share market rises despite the economic decline. If they do not, they will be accused of creating the bubble.
This is all intertwined. Try to open your mind and be like a trader just following the trend and the capital flows. The market is always right – it cannot be wrong. Only we are wrong for when the market does something we did not anticipate, our analysis is at fault not the market.
Jean-Claude Juncker is creating a Political EU Commission – Non-Politicians Get Out
Incoming European Commission president Jean-Claude Juncker has cleverly created an EU executive that is essentially former politicians only.His intention has been he wants only political experience to become a commissioner. He began soliciting a number of ex-prime ministers on his team who know the job and how to handle public opinion.
Juncker realized that the EU is on the brink of a meltdown. He wants only politicians who know how to play the game to shift even more power to Brussels. This is a big gamble for it demonstrates they still refuse to reform a serious structural mistake.
Business Cycle & Economists
COMMENT: You are correct. I went to the London …. and they said there was a business cycle but it was random and but it could not be defined.
Cheers
RB
REPLY: Yes. Somehow everything inverted after Keynes. Even Marx never said there was no business cycle nor did Keynes. Both sought to manipulate it, but they did not deny its existence. This evolution to a state of denial has taken place post-Keynes. Paul Volcker explained it best in 1978 within his Rediscovery of the Business Cycle:
“The Rediscovery of the Business Cycle – is a sign of the times. Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment.”
The economists who are in a state of denial are extremely dangerous people. Like Rogoff of Harvard, they assume we are sheep and that economists and government possess both the mental/physical capacity and the right to manipulate the people. I disagree with that entirely. So I say stop criticizing and PROVE there is no business cycle and that government has been capable to preventing a recession even one time.
I for one would love to split the country in two and all those people who want to control others should all go to the left side and leave the rest of us alone on the right side of the divide. The problem is, they always want to rob what other people have to make their world better for them. They are not satisfied with their own productivity, they covet what everyone else has without having to work as hard for it. The bottom line – we should have less human rights to be free for we possess something they want.
BREXIT – Bank of England Researching Departing from EU
The Bank of England is studying the implications of a possible British exit from the European Union where it slipped in an email to the Guardian acknowledging such a study. This is standard operating procedure for the BoE and it should be expected. It is by no means confirmation that Britain will leave. Rather, it is studying what if that ends up as the case given the political tensions rising over the Euro and demands upon Britain to send Europe money.
British Prime Minister David Cameron, who was re-elected on May 7, has pledged to reshape Britain’s ties with the EU before holding an in-out membership referendum by the end of 2017. It appears that by that time, the Brits may very well vote to get out. We will run our projection on the political ramifications whether they will vote to exit or not. So far, everything appears more-likely-than-not that Britain will exit the EU for it is unlikely that Brussels will change course. Saving the Euro is all about saving their jobs in Brussels – not about saving the European people.
It’s All Connected – Just Open Your Eyes
COMMENT: Hi Marty,
I must say your analysis of the dow for the last six months is simply mind blowing.
Everything you said has been accurate. You are right that most will not get what your saying because they are stuck in a linear world – not a dynamic world.
You did say markets would churn into May. You were SPOT on. I guess what throws most is when you say we could get a high in May/June or September. They can’t process the dynamism. They guys would be good candidates for government work where they can just try control everything.
Indeed I am looking forward to the biggest “mind twisting” trade of the century, as you say. It is looking at this stage like a May/June high – everything is truly connected. You have opened my eyes forever.
Please bring Socrates online soon – it is your piece de resistance. I think I may speak for many when I say that I’m happy to have it just talk to me for now!
Best regards,
Nick
REPLY: It is so hard for many to understand how everything is connected and to separate me from the computer. The vast majority who disagree always make this personal rather than the analysis. The churning of the Dow until May was connected to the dollar rise and the collapse of the Euro on just one level. If you would normally see a decline that everyone was calling for in the US market, they missed the currency play which would provide steady support for the Dow.
This is the same connection why I warned the White House in 1985 that forming the G5 to lower the valid of the dollar by 40% would set off a crash in 2 years. That came precisely to the day of October 19th on the Economic Confidence Model 2.15 years from the bottom of the 51.6 year wave 1985.65.
Government is clueless when it comes to currency and this is reflected in mainstream analysis, which just ignores capital flows. Since the Japanese had bought nearly 40% of the US debt and were buying property and stocks in the USA, G5 was telling them they were going to devalue those assets by 40%. A moron would sell if the government told him he would lose 40%.
I was called in by the Brady Commission for we ended up with 4 clients on the Commission investigating team who insisted we be called in. My biggest accomplishment was to stop punitive sanctions against the market and the Brady Commission reported just politely saying they thought foreign exchange had something to do with the Crash.
I wrote to Rubin when he was Secretary of the Treasury and was starting the same jawboning against the Japanese yen. It was Geithner who had to respond.
The reply was short and sweat, but they policy changed and they shut up with trying to talk the yen down again.
The Euro is in trouble for the same reason. They did not understand currency – nobody in government seems to understand this subject matter or for the most part in mainstream media. The EU Commission failed to consolidate the debts even after attending our 1997 London World Economic Conference taking the whole back row. Southern Europe converted their debts to Euro and the currency rose from 80 cents to $1.60. They then owed TWICE as much as what they did before the Euro and then Brussels yells at Greece when they are the victim here and did nothing but get screwed out of this deal.
So the Dow has traded sideways and that was ONLY possible if the dollar rose and the Euro crashed. So it is NOT my personal opinion, this is simply how the world functions for EVERYTHING is truly connected. We forecast the high in gold for 2011 and in 2011 we warned the Dow would run off to New Highs which was even reported by Barron’s. One forecast is connected to the other. This is not a matter of luck. This is a matter of global correlation and opening your eyes.