Economic Presence
  • Home
  • Paradox found
    • Paradox found

More safety equipment leads to more injury

2/5/2016

0 Comments

 
Quartz I wrote about this principle 5 years ago.
0 Comments

Hugh Hendry's latest investment letter

11/3/2015

0 Comments

 
Value Walk
The prevailing mantra in many of today’s investment commentaries reminds me of the satirical plot to the 1964 Stanley Kubrick movie Dr. Strangelove, in which a deranged United States Air Force general orders a first strike nuclear attack on the Soviet Union, convinced that the Soviets have been adding fluoride to the United States’ water supplies to pollute the “precious bodily fluids” of Americans.

Today’s grumpy bears likewise allege that our central banks have been adding funny stuff to the world’s money supply via QE and have polluted the sanctity of the market pricing mechanism. As a result we have (too) high asset prices despite low growth and no inflation. In this pessimistic interpretation of the global economy the biggest complaint is the incapacity of central banks to raise interest rates; they have now been kept unchanged in the US for longer than during the Great Depression.
If only those dastardly public officials had not averted a 1930s style policy of mutually assured destruction, when the world’s monetary authorities stuck rigidly to the mantra of “hard-money” to the profound detriment of the real economy! Then, so they reason, we could have had the cathartic effects of a depression and by now, seven years later, a recovery would be in full swing, signs of inflation would be emerging and we could start raising interest rates…we would be saved! Strange days indeed…and now, like the mad Brigadier General Ripper, they pin their hopes on the first strike attack policy of creative destruction via unnecessary rate hikes, deluding themselves that such a disastrous course could possibly promote innovation, growth and prosperity.
Never mind that such a policy is most unlikely. To us, this is no way to build anything spectacular. An appropriate analogy perhaps is to compare the economy to the Amazonian rainforest – more complicated than we can possibly imagine. To us, the notion of not intervening, or worse the policy of pursuing tight monetary policy to ignite creative destruction is no way to protect and encourage a truly diverse ecosystem. Instead, we favour the modern orthodoxy whereby policy makers protect the system with their fire breaks allowing the disrupters like Uber and the explosion of free services ranging from Google Search to Skype to Wikipedia et al. to thrive and Forcibly redirect capital and labour elsewhere within the economy. Given enough time and a generous prescription of QE, and shorn of the tail risk of MAD policies, the global economy will eventually recover most of the diversity, durability and growth it once had.
But as it stands right now, macroeconomic presentations seem to have been lifted straight from the pages of religious pamphlets and science fiction novels which overwhelmingly present a future that is mainly worse than the present; a similar mood was evident in the first Jack Schwager Market Wizards book published, not surprisingly, after the calamity of the October 1987 crash. The best minds back then, like today, were convinced that our future was very bleak. We can only conclude that capital markets seem to hoard innately pessimistic desires and that therein lies the opportunity for risk takers like us.

Such anxiety has very much been to the fore again this year, something we found reassuring during the particularly tough months like August when the VIX spiked above 50 and again last month when we were subject to a vicious countertrend re-pricing of the year’s winners and losers. This angst is perhaps the true disease of the 21st century. Cancer and diabetes will most likely be cured in time (preferably by the European drug stocks that we own in our portfolio) but anxiety seems more deeply rooted in the human psyche. In markets, of course, it can be useful, especially if you become anxious before others; we have some good form here. Indeed, it is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!
For markets do not crash when we are collectively so worried; it is like Hyman Minsky’s adage that stability destabilises except that today the reverse is more apt. In our minds it is as though quantitative easing and the zero lower bound of policy rates have replaced the capital markets’ airbag with a dagger protruding from the steering column. Market participants are hugely uncomfortable with today’s elevated prices and the lack of an obvious orthodox policy response should the global economy weaken further. Unsurprisingly there is little appetite to drive fast and the brakes are applied at the merest hint of danger. In short, by withdrawing the “Greenspan put” and using their asset purchase schemes to eviscerate any notion of value, the authorities have paradoxically created a safer yet more paranoid market.
The market’s fear of crashing has seen it thrash around looking for the merest hint of danger. First it was Europe, then the high yield credit space with the vulnerabilities of the shale oil issuers, and then it was back to Greece and then the mother of them all, China, with its falling property and stock prices seemingly knocking economic growth and making a sizeable devaluation inevitable. And yet nada… the weeping prophets have failed to force a crisis after one hell of a go. There have been no observable widespread bankruptcies in China, the shale oil sector is still pumping and despite the huge EM devaluation we haven’t exposed large fragile dollar debts which can’t be repaid or rolled over.
Perhaps we are being premature and the cards are about to fall. Or perhaps there simply are no dead bodies in the system and the global economy has proven itself much more resilient to shocks. We certainly believe that if we had been forewarned two years ago that the dollar would rise versus selected EM currencies by 50% and that important commodities such as oil and iron ore would fall by 50% we would never have been able to predict just how orderly things have turned out at both the company and sovereign level. The turmoil it seems has remained contained within financial markets in a very curious way. Like we said earlier, perhaps it’s time to stop worrying and love the bomb?
0 Comments

The Fed is getting scared about exiting from QE

11/21/2013

0 Comments

 
Tim Duy dissects the latest FED speak:

"Notice a theme above? Fed officials have little faith in any of their alternatives. They want to pull back from quantitative easing, fearing that the costs will turn against them soon, yet have little to offer in return. Not good - it is almost as if the Fed is beginning to believe that they are near the end of their rope.

Interestingly, one of the costs of quantitative easing seems to be the inability to exit quantitative easing.

.......

Bottom Line: Clear evidence of the space we have been in for months. The Fed wants to taper, and is becoming increasingly nervous they will need to pull the trigger on that option before the data allows. That means that tapering is not data dependent. That means the policy deck is stacked with at least one wild card. And that sounds like a recipe for the kind of volatility the Fed is looking to avoid."

0 Comments

Send In The Clowns

7/1/2013

1 Comment

 
BIS summarizes what I have repeatedly been saying about CBs creating systemic risk. Quoted in Hussman's latest weekly commentary.

“Originally forged as a description of central bank actions to prevent financial collapse, the phrase ‘whatever it takes’ has
become a  rallying cry for central banks to continue their extraordinary actions. But we  are past the height of the crisis, and the goal of policy has changed – to  return still-sluggish economies to strong and sustainable growth. Can central  banks now really do ‘whatever it takes’ to achieve that goal? As each day goes  by, it seems less and less likely. Central banks cannot repair
the balance  sheets of households and financial institutions. Central banks cannot ensure the  sustainability of fiscal finances. And, most of all, central banks cannot enact  the structural economic and financial reforms needed to return economies to the  real growth paths authorities and their publics both want and expect. 

“What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time  has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy  for the government to finance deficits, and easy for the authorities to delay  needed reforms in the real economy and in the financial system. After all, cheap  money makes it easier to borrow than to save, easier to spend than to tax,  easier to remain the same than to change.

 “Alas, central banks cannot do more without compounding the  risks they have already created. Instead, they must re-emphasise their traditional focus – albeit expanded to include financial stability – and thereby  encourage needed adjustments rather than retard them with near-zero interest  rates and purchases of ever larger quantities of government securities. And they  must urge authorities to speed up reforms in labour and  product markets, reforms  that will enhance productivity and encourage
employment growth rather than  provide the false comfort that it will be easier later.”

I have been saying this for years. One of my challenges is that I see things many years in advance. As a friend of mine once told me, there is no corporate market for that skill.

Isn't it rich?
Isn't it queer?
Losing my timing this late in my career.

And where are the clowns?
There ought to be clowns...
Well, maybe next year.

1 Comment

Fed acknowledges it may be causing financial market instability with QE

4/22/2013

0 Comments

 
"In this way, unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger  activity. All of these financial market outcomes are often interpreted as signifying financial market instability. And this observation brings me to a  key conclusion. I’ve suggested that it is likely that, for a number of years to  come, the FOMC will only achieve its dual mandate of maximum employment and  price stability if it keeps real interest rates unusually low. I’ve also argued  that when real interest rates are low, we are likely to see financial market  outcomes that signify instability. It follows that, for a considerable period  of time, the FOMC may only be to achieve its macroeconomic objectives in
association with signs of instability in financial markets."
That's what I said nearly two years ago.
0 Comments

Soros CBs are creating financial instability 

4/5/2013

0 Comments

 
Zerohedge. Tha's what I have been saying.
0 Comments

How should central banks think about the financial system?

1/30/2013

1 Comment

 
The central bank can create systematic risk while trying to stabilize the economy. I said this 18 months ago.‘constructive ambiguity’ needs to be reevaluated.
1 Comment

You Have to be Cruel to be Kind- In the Right Measure

9/26/2011

0 Comments

 
I picked up a copy of``` Psychology Today`` last Christmas and I came across an interesting article on road design and safety. It turns out that the flatest, widest  roads are the most dangerous. Engineers are now designing roads with obstacles and making them more narrow in order to make them safer.

I had been thinking a lot, before running into that article, about this very idea wih resepct to central bank behaviour. I believe the US Federal Reserve telegraphs too much in terms of its policy intentions and the market has become somewhat addicted to the Federal Reserve bailing it out in times of trouble. I don´t think it is healthy for the market to perceive a ``Bernake put``. Furthermore, as I mentioned in an earleir post ``We are all hedge fund managers now`` the central bank is creating an incentive to market particpants to play much of the same game in selling short term risk. This is apparent from the levels of the VIX in the aftermath of the global finanacial crisis.

To me optimal central bank policy would have a level of randomnss, where interest rates could go up even in a recession even without inflation being sparked.  This would have the effect of increasing volatility and cause everybody in the economy to delever because VaR models set their limits on the basis of volatility. Taken far enough it would encourage long term contracting and thus further reduce interest rate exposure to the broader economy. Clearly, this is  going to be a problem as we move to higher interest rates because everyone is on the short end  floating - getting to fixed is going to be tricky.

And yet as much as unpredicatable is optimal; it is very difficult to operationailze. Imagine if the Fed would say , ``our randomenss model tells us we need to set short term rates at 3% - right now``. A recent blog post highlights this tension:


Much like John Boyd, Sun Tzu emphasised the role of deception in war: “All warfare is based on deception”. In the context of regulation, “deception” is best understood as the need for the regulator to be unpredictable. This is not uncommon in other war-like economic domains. Google, for example, must maintain the secrecy and ambiguity of its search algorithms in order to stay one step ahead of the SEO firms’ attempts to game them. An unpredictable regulator may seem like a crazy idea but in fact it is a well-researched option in the central banking policy arsenal. In a paper for the Federal Reserve bank of Richmond in 1999, Jeffrey Lacker and Marvin Goodfriend analysed the merits of a regulator adopting a stance of ‘constructive ambiguity’. They concluded that a stance of constructive ambiguity was unworkable and could not prevent the moral hazard that arose from the central bank’s commitment to backstop banks in times of crisis. The reasoning was simple: constructive ambiguity is not time-consistent. As Lacker and Goodfriend note: “The problem with adding variability to central bank lending policy is that the central bank would have trouble sticking to it, for the same reason that central banks tend to overextend lending to begin with. An announced policy of constructive ambiguity does nothing to alter the ex post incentives that cause central banks to lend in the first place. In any particular instance the central bank would want to ignore the spin of the wheel.” Steve Waldman summed up the time-consistency problem in regulation well when he noted: “Given the discretion to do so, financial regulators will always do the wrong thing.” In fact, Lacker has argued that it was this stance of constructive ambiguity combined with the creditor bailouts since Continental Illinois that the market understood to be an implicit commitment to bailout TBTF banks.



0 Comments

    Author

    Karl Pinno

    Categories

    All
    60 Minutes
    Abnormal Returns
    Academic Publishing
    Advice For Econ Students
    Age
    Aid
    Algo Trading
    Aluminum
    Argentina
    Assortive Matching
    Austerity
    Bank Of England
    Behavioural Economics
    Bio Weapons
    Bis
    Bloomberg
    Bonds
    Bono
    Book Of Mormon
    Brain
    Brazil
    Brics
    Bridgewater Associates
    Buffet
    Calgary
    Canada
    Capital Flight
    Carola Binder
    Cds
    Central Banks
    Chainmail Bikinis
    Chanos
    Child Rearing
    China
    Chris Martenson
    Christmas Wishlist
    Climate Change
    College Humor
    Commercial Banks
    Commodities
    Community
    Computer Programming
    Confirmation Bias
    Conservatism
    Conservative
    Constructive Ambiquity
    Consumer Confidence
    Copper
    Corporate Lending
    Counterparty Risk
    Creativity
    Credit
    Culture
    Cwb
    David Einhorn
    David Rosenberg
    Debate
    Debt Crisis
    Deflation
    Demographics
    Depression
    Development
    Dragons
    Dr. Ed's Blog
    Econ Blogs
    Economics
    Ecri
    Education
    Electricity
    Eurasia Group
    Eurozone
    Excercise
    Externalities
    Falkenblog
    Ferguson
    Fertility
    Filtering
    Financial Crisis 2008
    Financial Engineering
    Financial Reform
    Financial Repression
    Financial Research
    Fiscal Policy
    Fiscal Stimulus
    Fisher
    Fixed Income
    Flood
    Food Prices
    Frank And Cook
    Fraud
    Freidman
    Ft
    Game Theory
    Gender
    Generalist
    George Soros
    Get Smart
    Giffen Good
    Global Banking
    Global Economy
    Gmo
    Godfather
    Gold
    Goldman Sachs
    Great Careers
    Greece
    Greenlight Capital
    Happiness
    Hayman Capital Management Lp
    Hbo
    Health
    Hedge Funds
    Homosexuality
    Housing Market
    Hubbard
    Hugh Hendry
    Hussman
    Ian Bremmer
    Imf
    Inception
    Income Smoothing
    India
    Inequality
    Inflation
    Inflationary Expectations
    Inside Job
    Interest Rates
    Interfluidity
    Intuition
    Inventories
    Iran
    Iraq
    Italy
    Janusian Thinking
    Japan
    Jordan Peterson
    Jp Morgan
    Judgement
    Kalecki Equation
    Krugman
    Kyle Bass
    Larry Smith
    Larry Summers
    Lehman Brothers
    Levitt
    Liberal
    Lonely Island
    Luck
    Macro
    Macro Intro
    Macro Predictions
    Management Consulting
    Marginal Revolution
    Market Design
    Market Monetarism
    Marx
    Matt Taibbi
    Mercantilism
    Michael Portillo
    Milton Friedman
    Mircea Eliade
    Mish
    Mishkin
    Monetary Policy
    Monetary Stimulus
    Multipliers
    Mundell
    Music
    Nanex
    Nfl
    Noahpinion
    Nobel Price In Economics
    Oil Price Volatility
    Oil Production
    Omitted Variable Bias
    Optimism Bias
    Overcomingbias
    Palantir
    Pettis
    Phillips Curve
    Placebo
    Podcasts
    Poker
    Poland
    Politico
    Politics
    Portfolio Management
    Prisoner's Dilemma
    Productivity
    Psychology
    Publishing
    Quality
    Quantitative Easing
    Race
    Rand Paul
    Ray Dalio
    Rbc Theory
    Real Interest Rates
    Reality Tv
    Recession
    Redistributionist Reform
    Regulators
    Regulatory Capture
    Remembrance Day
    Research
    Richard Wilkinson
    Riots
    Risk
    Risk Taking
    Robots
    Roubini
    Russia
    Ryan
    Sachs
    Salt
    Saudi Arabia
    Sec
    Seth Klarman
    Shadowbanking
    Shiller
    Signaling
    Smes
    Snap
    Social Policy
    Social Unrest
    Society
    Sorkin
    Soros
    S&P
    Spain
    Specialization
    Speculation
    State Sponsored Terrorism
    Status
    Steve Jobs
    Steven Keen
    Stress
    Structural Unemployment
    Structure Finance
    Sugar
    Suicide
    Svars
    Systemic Risk
    Tax
    Taylor Rule
    Technology
    Ted
    Television
    The Clash
    The Economist
    The Wire
    Thinking
    Thoureau
    Trade
    Trilemma
    Turkey
    Tyler Cowen
    U2
    Unemployment
    Us 2012 Election
    Us Economy
    Us Foreign Policy
    Velocity
    Volatility
    Welfare
    Williams
    Words
    Work
    Writing
    Zerohedge
    Zig Ziglar

    Archives

    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    February 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011

    RSS Feed

Powered by Create your own unique website with customizable templates.