All the World's a Stage
Age of Wisdom, Age of Foolishness (21)
The World was referred to as a stage in Shakespeare’s As You Like It and the Merchant of Venice. There is something Shakespearian about the current global-macro scene.
The quality of his mercy is not strained
The Yale Economist Robert Shiller evoked Portia’s speech, from the Merchant of Venice, when he recently opined,
“We seem to be at the mercy of our narratives”[i].
Behavioural Economists call this predicament the “Halo Effect”.
No Rites of Spring on "Main Street".
Shiller lamented that the animal spirits, so evident on “Wall Street”, have not taken hold of the economic agents on “Main Street”. Bizarrely, he seems to think that these animal spirits have crossed the street in Japan, to manifest themselves in a robust economic recovery.
The “Halo” is slipping
He seems to have fallen into the trap that Behavioural Economists call “Confirmation Bias”. The weak Yen has created domestic inflation, rather than a boost to real economic output. Rising Japanese prices are therefore seen by Shiller as a growth tailwind, rather than as the inflationary headwind that we observe. He is a connoisseur of the Kabuki theatre of the absurd known as “Abenomics”. Careful to maintain his professional reputation however, he swiftly qualifies his blinding by the“Halo Effect”, in saying that
“No leader can consistently shape the narratives that affect the economy. But that does not rule out the need to try”.
Japan provided further evidence of its attempts to reset its “Halo”, when it signalled that it would be bringing forward its fiscal stimulus to counteract the large drop in consumptionii. No doubt Professor Shiller will observe the impacts of this fiscal stimulus as more evidence of Japanese success, rather than remedial action to failure.
"a contrivance for one of those falsehoods that come into being in case of need, of which we were just now talking, some noble one”
(The “Noble Lie”: Socrates)
According to Shiller therefore, policy makers are story tellers; so presumably the greater the story the greater the policy maker. It all sounds like Plato’s concept of the “Noble Lie” explained by Socrates; later disabused by Karl Popper, Nietzsche and Leo Strauss, but most famously abused by Joseph Goebbels. The Federal Reserve seems to agree with Shiller, because it has now dropped all pretensions of economic rigour, by discarding “Quantitative Guidance” in favour of the “Noble Lie” called “Qualitative Guidance”.
Yesterday’s and Tomorrow’s Fish and Chip Wrappers
In the common man’s Thesaurus, used by the majority of Britons, generic “Qualitative Guidance” is called “Spin”; and in the vernacular it has the initials “B.S.”. The age of “Spin Doctors” and “Spin Professors” is now back with a vengeance, if indeed it ever went away. The global economy is at their mercy; and the quality of this mercy is not strained, if the daily headlines which then become tomorrow’s fish and chip wrappers are any guide.
Now that the quiet period surrounding the FOMC meeting is over, the members have the global stage on which to spin their own “Qualitative Noble Lies”. James Bullard used the stage at the Brookings Institution[ii], where Bernanke is also performing in rep, to signal that the Fed is dropping the “Noble Lie” called NGDP targeting. Bullard’s NGDP soliloquy opined that it is so difficult to track the appropriate potential GDP to be targeted, that the policy is impractical. This explanation can be seen as code for convenient “Qualitative Noble Lie” replacing “Quantitative Noble Lie” that has lost its efficacy. What was interesting about Bullard’s speech is that it now puts the spotlight on Mark Carney’s “Noble Lies” at the Bank of England, which is still playing the NGDP targeting act. We placed a big question mark over Carney and his performance as Governor in Age of Wisdom, Age of Foolishness (20) “To QE Infinity and Beyond”. His performance was critiqued as being strong on presentation but weak on substance. Much of Carney’s substance was based on his “Noble Lie” named NGDP targeting[iii]. Bullard has now moved the question mark from Carney’s presentation style to the substance of his presentation.
“That’s not ‘Tapering’, it’s ‘Easing’ with style.”(Richard ‘Woody’ Fisher)
Richard Fisher went on stage at the London School of Economics and embraced the efficacy of the “Qualitative Noble Lie”; which he referred to as “sloppier”[iv]. He also made it clear that he sees a fiscal stimulus coming; and that he does not see any Fed tightening until well after the “Taper” has ended. Having lampooned the Congress in the past for being “dysfunctional”, he now hints that it will soon be functioning again. We suggest that this functionality will involve a fiscal transfer to selected members of the “Middle Class”, via the tax code, which will be enabled by the Fed being “sloppy”.
Jeremy Stein used the stage at Georgetown University to sound a note of caution about the unintended quantitative consequences of faith in the “Qualitative Noble Lie”[v]. The quality of risk assets is in the eye of the beholder; who may not always look through the frames provided by the Fed. Stein did his best to deflate a bubble in riskier assets and higher yielding securities, created from blind faith in their perceived quality. It is clear that he does not think that the current price level of some of the riskier assets accurately reflects their risks going forward, in the new “Qualitative” Capital Asset Pricing Model universe. His latest speech was reminiscent of Bernanke’s speech in spring 2013[vi], which warned the Alpha Males “reaching for yield” to stop doing so.
It seems that, for the last two years, the Fed has also seasonally tried to curb the springtime animal spirits, which Professor Shiller now craves, in order to deliver a policy that unlocks them later in the year. At the same time last spring, we noted that Yellen and also Stein had made similar speeches to deflate the developing bubble in risk assets. This also corresponded with the seasonal attempt of American policy makers to ignite the animal spirits of Core Europe. Last time, all three speakers seemed intent upon engineering a correction in risk asset prices, through a rise in interest rates, which would not put the value of the Fed’s expanded balance sheet at risk. Clearly this time around, “sloppy” “Qualitative Guidance” is being used for the same purpose. The balance sheet will remain expanded, even as interest rates rise; however its value will be supported by the flight to quality out of riskier assets.
The Fed is intent upon triggering a “Risk Off” correction, which can be explained away by China and the Ukraine. This correction will serve as the headwind that will bring forward the landing of the “Helicopter”. The Fed is more interested in driving credit spreads wider, than in driving benchmark interest rates higher at this point in time. The “Taper” should therefore be viewed as a correction in yield spreads rather than a bear market in US fixed income.
The nudge provided by the Fed is however most unwelcome in the Eurozone and China. In China, the authorities would like their audience to believe that the economy is landing softly and that a new growth wave is just around the corner. In Europe, the ECB is currently stress-testing the banks; and finance ministers are laying the foundations for Bank Mutualisation. A sharp correction in risk assets therefore is not in the interest of European and Chinese policy makers. Consequently, one can observe the Chinese and European Plunge Protection Teams supplying liquidity, in the form of “buy on uptick” orders, on the opening and closing of their respective time zone market hours. The Euro also seems to be getting the Plunge Protection bid at the same times. It is unlikely that the regulators will investigate this pattern of market manipulation however, since they may end up investigating the other hand of the same body.
Strategists advise clients to buy Europe over the US, because the Fed is now in the tightening cycle and the ECB has yet to finish easing. This advice is strongly reflected in the price action on market openings and closings, so one suspects that the Plunge Protection Team is also receiving support from the global-macro funds. There is however a massive disconnect building between Eurozone risk asset prices and economic fundamentals. Low Eurozone interest rates have stimulated flows into the riskiest Eurozone assets. Low interest rates however taken the pressure of Governments to stay the course on fiscal and economic reforms to make their economies competitive.
Eurozone economic policy is therefore highly geared to low interest rates. As Draghi has opined, interest rates cannot go much lower however. Anyone buying Eurozone risk assets must therefore have a very strong opinion that Germany is about to allow something verging upon deficit monetisation to occur. This may ultimately prove to be the case, but the markets are pricing a very smooth transition to this outcome. Such smooth outcomes never occur in practice; especially when the Fed is moving into alleged tightening mode. We suggest that the headwind being created by the Fed is ultimately part of the process to force the Europeans down the deficit monetisation route. We also suggest that the headwind created by the Fed in the American economy, is by design to ultimately reverse the tightening which the markets are now doing on the Fed’s “Qualitative” instructions. In the bunker, at the heart of Core Europe, Jens Weidmann continues to walk a deliberately ambiguous line[vii]. At face value (and in the context of the efforts of the Plunge Protection Team), he said something incredibly bullish when he opined that QE was a possible unconventional policy solution.
Attention focused on the finger of QE and not what it was pointing at. The finger was indicating that this QE could not be legally allowed to break the taboo on deficit monetization. QE and deficit monetisation cannot be mutually exclusive, as Weidmann knows. He just did enough to keep hopes alive for European risk assets, whilst the ECB tries to get its hands round the problem of stress testing banks in preparation for Bank Mutualisation. Ostensibly, Weidmann appears to be supportive; when in actual fact he has been equivocal. The absurd situation is being created by which if the German Courts say QE is not deficit monetisation, that Weidmann will be bound to agree with them. The stage is being set for a courtroom drama which will determine the survival of the Eurozone.
James Bullard gave the Long Europe/ Short US trade another surge when he reported that the Fed has not yet discussed the timing of the end of QE. He sees a wide window of opportunity from Q4/2014 to Q1/2015[viii]. The “Helicopter” in the form of income redistribution via the tax code, must therefore be seen as coming just prior to the end of QE. Governor Yellen appeared to commit a huge faux pas; when she said that there would be approximately six months between the end of QE and the beginning of tightening. This estimate however seems to fit Bullard’s window of opportunity quite neatly. Further credibility to her slip of the tongue was provided by Charles Plosser; who opined that she had deliberately erred[ix]. James Lockhart then tried to mitigate the collateral damage from Yellen’s comments, by saying that the second half of 2015 would be the earliest moment for tightening[x]. It was however too late; as the damage to the term structure of interest rates and credit spreads had already violently moved to discount the worst case scenario.
“Alas poor Yellen”
Unfortunately, Narayana Kocherlakota is not on the same page of the book of “Noble Lies”; in fact he seems to be reading a different play altogether, possibly Hamlet. Kocherlakota is the most dogmatic and least flexible Fed Governor. His lack of flexibility made him a late convert to “QE”; and also prevents him from acting the contemporary “Taper” role. He has therefore become a “Dissenting Dove”. Like a broken clock however, if he sticks to his guns for long enough (and does not go insane), he will be proven right again when the “Helicopter” lands. The behaviour of the discounting mechanism known as price discovery in the housing market, suggests that he will have his day.
The latest new home sales data for February have just started to roll-over. There was a widespread acceptance of the negative “Halo Effect” created by the inclement weather; however now the Fed has effectively unleashed some cyclical bad weather of its own on mortgage interest rates which will have a chilling effect throughout the economy. If the Fed intended to never exit QE, it could not have done a better job ensuring this outcome.
The “united captains” of “the Night Watch” prepare to march out to meet the evil empire
After the Fed actors had played their part, the Commander in Chief entered European Stage - Left, for a war council with the coalition of the willing in “Team Europe”, whilst Russian forces massed European Stage-Right along the Ukrainian border (and Moldovan border) in greater number than during the previous “dress rehearsal” on the Crimean stage[xi]. The stage backdrop, chosen for this scene, was Rembrandt’s “Night Watch”; depicting the united Protestant and Catholic armies of Holland marching out to face the evil empire of Spain. In today’s contemporary restaging, “Team America” and “Team Europe” united with a handshake. They have yet to march out to face the new evil empire however.
“Aupres de ma blonde”
Europe may not actually take the field at all. “Team Europe’s” handshaker on this occasion, has one hand tied behind his back by the extreme right wing politician Geert Wilders[xii]. In France over the weekend, the Far Right also made further inroads into the political mainstream[xiii]. The new Ukrainian government, having allied with the Far Right during the protests against Yanukovych, is now in the process of removing the country’s most extreme Far Right leaders with “extreme prejudice” in order to avoid further embarrassment[xiv]. When President Putin asks who’s the Fascist now, “Team Europe” may be lost for words and credibility. Further credibility may be lost as the Periphery returns to the kind of anarchy which led to the rise of the Far Right. Whilst the Far Right was marching into the French political mainstream, over the weekend, Spain lurched back towards the Spanish Civil War which saw Franco’s Far Right take over the country as crowds protesting austerity turned violent[xv].
“With great power comes great responsibility”
“Team Europe” is now under extreme pressure from “Team America” to become like a more traditional American Superhero; and deal with its neighbourhood bad guys.
“Theatre in the Round”
G8 has just become G7, sans Russia; as the first meaningful act of retaliation. The next G7 Summit will be in Brussels and not Sochi as planned. The importance of this next venue, in the heart of the EU, is clear. “Team Europe” is now assuming greater responsibility; and is in the vanguard rather than following America. A new Empire of the West has emerged to confront the Empire of the East. The Round Table Movement, which until now had been dominated by Anglo-Saxons, has genuine European Knights in its new world order. The Knights’ Quest lies due East, South-East.
“Not your great, great, great grandfathers’ Crusade”
One wonders if these Knights will have the same Crusading Spirit as their chivalric forebears. They will certainly need to show more willingness to bear arms. The current scenario in Europe is very similar to the situation that launched the Crusades. The crumbling remnants of the old Roman Empire led to a general European wide anarchy, which was reversed by the call to fight the Infidel and appropriate his bounty. Today’s Infidel is to be found in the East and the Middle East; where the Oil and Gas bounty are.
Within G7, energy poor Europe is now considering its options for alternatives to Russian Gas[xvi]. Clearly American Shale Gas is one such option; but Shale Oil will require Congress to allow exports. Under the current circumstances however, it is clear to see that Congress will not reject a request from a NATO ally which is facing down an angry bear. There is also the alternative of Oil and Gas from the traditional sources in the Middle East. If Iran is brought back into the fold, then the opportunity is even greater. The bonus from Iran would also allow America to keep “Pivoting”. Europe must however step into the void being vacated as America “Pivots” away from the Middle East; which may involve European boots on the ground in some places. American Shale Gas is the lowest fruit on the tree, however one suspects that “Team America” will be asking “Team Europe” to assume more military responsibility in the hydrocarbon rich regions that America is “Pivoting” away from. American Shale is a small carrot and the Middle East is a bigger stick. Europe may therefore find it necessary to accelerate its Renewable Energy options, as America and China have been doing. One senses that the drama being acted out is all about a European Renaissance of sorts; in which “Team Europe” accepts the great responsibility that comes with great power.
In Age of Wisdom, Age of Foolishness “Putting the F Back in the Federal Reserve” “Team America” was observed to be using allegedly coincident global-macro events, to save Democracy and the American way, through the process of Wealth Redistribution[xvii]. “Putting the F Back in Fatherland” observed how “Team Europe” was being mind-melded into this worldview in vivo; in the live “lab rat” experiment more commonly referred to as Ukraine[xviii]. NASA rhetoric boldly went where no man has gone before last week; when it signalled an omniscient and perspicacious worldview, of all these temporal experiments, from the heavens[xix].
“There’s still life down there, but not as we know it”
A new study, sponsored by NASA’s Goddard Space Flight Centre, has directly linked the issue of Wealth Inequality to Climate Change. This linkage allegedly heralds the collapse of Industrial Civilization. It is what is referred to as a “slam dunk” in polite intelligence circles. When a reputable scientific source, beyond reproach for any form of subjective bias, connects Climate Change to Wealth Inequality politicians have the perfect excuse to appear to listen; and then make policy decisions based on what they have allegedly heard from the experts.
“We choose to [Save Democracy and the Planet] in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too."
Having recently seen China’s Premier Li declare “War on Pollution”[xx], there will no doubt be an emotive Kennedy style “Apollo Moment” speech, from the teleprompter that teleports words to the President’s lips, which more eloquently does the same.
President Obama may actually be thinking “Beam me up Scotty” however; since even after the recent freak weather, the majority of Americans believe that Climate Change is a subject that has been exaggerated[xxi].
“Sieg Sieg Sputnik”
Presumably President Putin will also have his own “Sputnik Moment” which is powered by Gas; and commits further heresy by denying Climate Change. He will thus fit the convenient evil stereotype of an anachronism in terms of politics, economics and science. Economic sanctions on his political behaviour will then be accompanied by righteous taxes on his hydrocarbons.
Meet the new new world order, just like the old “New World Order”
It was amusing to see President Putin finally getting some recognition, for creating a “new world order”, by the Economist. This dubious accolade is very disingenuous, as he has been part of this alleged order since he first emerged onto the global-macro scene. More dubious was the magazine’s decision not to use quotation marks or capital letters for the “new world order” alleged on its front page. One must assume that this is deliberate editorial policy, to avoid the direct connection of President Putin to an alleged “New World Order” conspiracy, which was referred to in name by George H. W. Bush when Kuwait was invaded by Saddam Hussein.
The committee to save the world september 16th 2013
“Now and Then”
As we have observed since 2013[xxii], President Putin still gets no credit for being a member of the Committee to Save the World. Neither does he get credit for enabling the “Pivot”. In Age of Wisdom, Age of Foolishness (18) “Beyond the Pale” it was suggested that his quid pro quo was Crimea; however that the assent from his other Committee member was less than sincere[xxiii]. Putin’s Ostracism in the public domain now puts him “beyond the Pale”; and also puts the real ethnic issues in the Pale of Settlement safely beyond the reach of inquiring minds.
“This Land”,“My Land”, Homeland, Motherland, Fatherland
The obfuscation was neatly portrayed by the latest iconic Time Magazine cover. This deserves to be displayed with the original “Committee to Save the World” cover, which was used to “frame” public opinion the last time similar global-macro events heralded a paradigm shift by the policy makers. If President Putin did not exist, someone would have to create him in order to bring about the momentous changes currently being undertaken in Europe and the Middle East, which allow America to “Pivot” towards China. This observation begs the question of how and where he was created in the first place; in much the same way that President Obama’s origins were questioned at great length when he emerged onto the global-macro scene.
In the heart of Core Europe meanwhile, the Far Right is enjoying the kind of popular support that Ukraine’s Svoboda Party also enjoys. The Netherlands has recently tried to put its own Far Right leader Geert Wilders “beyond the Pale” in the run up to European elections[xxiv]. Russian observations about the threat of the Far Right from Europe may soon become difficult to ridicule, once the results of these elections are known.
On the eve of Iranian New Year, President Obama sent the Iranian people a personal Happy New Year Message[xxv]. In “Beyond the Pale” it was observed that the only way for Prime Minister Netanyahu to get President Obama’s attention, is by putting the “Pivot” at risk. As tensions escalate in the Ukraine, Russia has just played its Iran chess-piece by threatening not to cooperate with the new negotiations between Iran and P5+1[xxvi]. The “Pivot” is now officially at risk; and presumably both Russia and Israel have President Obama’s undivided attention.
As America “Pivots” towards China, both countries “Pivot” towards Climate Change and Wealth Inequality as the two main challenges to sustainable economic growth and a sustainable planet. Last week China announced that it would be launching a $162 Billion fiscal stimulus aimed at the urban poor[xxvii]. China did not wait long for the economy to cool, after the People’s Congress, before embarking on a new fiscal stimulus. One can hear and see the two countries policy makers singing from the same hymn sheet. China has officially moved first; whilst America is using the slow moving democratic levers to apply its own fiscal stimulus via the tax code. America has a Federal system of Government, which means that the States can move swiftly on Climate Change however, even if the President never signs up for Kyoto. China never signed up for Kyoto either, because it was primarily concerned with achieving industrial economic parity with America. Having achieved financial parity, China is now trying to make a quantum leap ahead in terms of industrial parity in the new global economy. China has a monopoly on the Rare Earth elements which are needed to enable this quantum leap; and since it has now decided not to waste any more of its currency reserves on yesterday’s industrial model, a quantum industrial transformation is entirely achievable.
Mr. Market is up the Yin-Yang
The China Bears are now doing Mr. Market’s work of price discovery, during the liquidation of bad debt phase of the credit cycle, in real time[xxviii]. Mr Market is therefore doing the work of the policy makers, by reallocating capital efficiently at market derived rates of interest. Mr Market’s current prices however do not discount a “transformed” Chinese economy of the future. In fact, the prices currently being discovered by Mr Market provide the Bears with confirmation bias that there will be no such “transformed” future. Falling prices therefore beget further falling prices, because they confirm that prices are falling; which some believe is the only justification for why prices are falling. As Montaigne observed “nothing is more firmly believed than that which is least understood”. There is however already clear evidence of margin expansion in the Solar sub-sector of the Renewable sector; which indicates that this “transformed” future is already present[xxix]. At the Peoples’ Congress, Premier Li emphasized the “flexible” nature and pragmatic approach of the leadership towards growth targets[xxx]. Weaker growth should be read as the removal of excess and the deflation of the Shadow Banking Bubble. This message seems to have been lost in translation, so the policy makers have re-emphasized the correct meaning of “flexibility” by embarking on a new fiscal stimulus through public works[xxxi].
Star Spangled Banners with new Panels and Blades
2013 is being widely acknowledged as the year that the Renewable Sector, led by Solar, began its next leg of secular expansion. Goldman Sachs certainly believes this; and has earmarked at least $40 billion of its own funds for Renewables[xxxii]. Norway’s Sovereign Wealth Fund is now talking of putting approximately 5% (also $40 billion) of its nearly $ 1 Trillion assets into this space[xxxiii]. Goldman is a particularly interesting case, because it also made a very aggressive buy call on China recently. A bet on China is therefore a leveraged Emerging Market/ Renewable Bet all in one. The current discounted price entry level, being discovered by Mr. Market, provides not only what Buffett and Graham like to call a “margin of protection” for bad timing, but also the source of the future Alpha. The indiscriminate Beta sell-off, of all China risk, is therefore creating the Alpha of the future. The Bears’ crisis is in effect the Bulls’ value creation. Fundamentally, the value is however already there in the Renewable Sector. How much value now depends upon how aggressive the Bears become. Norway’s move suggests that there is something more fundamental than just Goldman’s proprietary bet going on.
There is currently fiscal stimulus in China, America and also Japan. Japan has gone even further and continued a monetary expansion, when China and America have begun to scale down their own QE programmes. Europe remains conspicuous, by its lack of fiscal stimulus and concurrent declining monetary stimulus, as the OMT winds down; which are both facts that other nations have no doubt opined upon at various iterations of the “G-Something” summits. So far, “Team Europe” has not had its own G-Whizz moment; but there are signs that “Team America” is on its case.
Having already seen President Putin,“ Putin’ the F Back in the CFR”[xxxiv], it was therefore no surprise to see the same CFR start to apply its own pressure on “Team Europe” to become more like “Team America”. In “Putting the F Back Fatherland” it was suggested that the next European battle would be between Germany and Draghi, over the use of Target 2 to “monetise” the capital accounts rather than current accounts of Eurozone nations. This suggestion came from the conclusion drawn about the New York Fed’s fulsome praise of the Target 2 system[xxxv]. The CFR followed up last week with a bombshell; which suggested that Wolfgang Schaeuble was ready to sign up for centralised Eurozone deficit monetisation, under the aegis of Draghi, as soon as the German Constitution was amended to accept it this summer. Was it wishful thinking from the CFR or something more insidious? Rewriting the German Constitution would in effect transform “Team Europe” into the kind of team that “Team America” would like to play with. The EU is signalling a sincere intention to resolve the Bank Mutualisation issue, using a central resolution authority, which supports the thesis that Europe is moving forward together[xxxvi]. It was reported that the German legal system is in the process of amending the interpretation of the Constitution, in order to ratify Germany’s involvement to date in the bailout process. The Federal Constitutional Court, last week rejected challenges to Germany’s participation in the ESM[xxxvii]. It should be remembered that the challenge to the participation in the OMT was previously transferred back to the European Court in Luxembourg. It therefore appears, to all intents and purposes, that the German legal system is making the country’s actions thus far legal. It is however a big leap of the imagination to extrapolate this to a full Constitutional amendment.
Jens Weidmann was observed to push back against further unconventional ECB policy in “Putting the F Back in Fatherland”[xxxviii]. His latest comments signal that he rejects “Team America’s” criticism that German export policy prioritisation vitiates against attempts to stimulate the Eurozone economy as a whole[xxxix]. His comment also signals that “Team America” is indeed interfering in Eurozone economic policy making. He reiterated that Germany’s trade surplus is a function of its advanced industrial economy and aging demographics. This implies that this trade surplus is both structural and permanent in nature. It is not clear whether Weidmann is against turning this structural trade surplus into a structural capital account surplus however, by recycling Target 2 to purchase the debt capital account liabilities of Germany’s trade partners. It is clear however that there are some issues being debated hotly right now. Target 2 and German Constitutional amendment are clearly part of this heated debate.
“I feel maximum flexibility in the Force”.
The real G-Whizz moment however came from the March FOMC meeting[xl]. The Evan’s Rule was read its last rites and the Unemployment Rate trigger was officially dropped. Quantitative Guidance has now gone Qualitative; which is a throwback to the arcane days of Chairman Greenspan. The Fed can now do as it pleases (and not as it says), based on its subjective qualitative perceptions of the economy. Forecasts are therefore worthless, as one always suspected that they were when they became constraining upon the Fed Chairman’s behaviour.
“These are not the inflation droids you’re looking for.” (Ben Obi Bernanke: Jedi Knight and Helicopter Pilot)
="font-size: medium;">What now matters is what Janet Yellen sees; and what she can make her colleagues appear to see. The Fed is now totally uninhibited or tied to any preconditions for action. It is totally “Flexible” and liberated; which means that the markets will become totally volatile in response. What better way to fly the “Helicopter” into the uncharted territory; where the Fed credits the accounts of individuals, whom the Treasury has selected, with quantised high velocity money via the Aether of the Federal Funds system at the speed of light? The uncertain outcome, of this new bold policy-voyage, requires the total “Flexibility” of the Fed, in order to provide more or remove too much quantised credit. Readers will note that “Flexibility” at the Fed reflects the “Flexibility” adopted by China at its recent Peoples’ Congress.
“Flexible it is, but I feel the Dark Side”
One waits for Chairman Volcker to wisely opine on the “Phantom Menace” inflationary outcome of the monetary and fiscal forces which are about to be unleashed.
The Basel Death Star
The Death Star in Basel has already gone to battle stations[xli] alert. Having opined on the evil of Quantitative Forward Guidance, in the run-up to the latest FOMC meeting, one wonders what the BIS will have to say about the Qualitative Forward Guidance recently announced.
To understand the “Flexibility” and the “Dark Side of the Force”, in their true context, it is useful to observe the behaviour of the emerging galactic superpower on the old Cold War chessboard. China is the putative emerging superpower, which has just announced a bold intention and capability to go where one of the incumbents (Russia) dare not go; and where the other (America) is half-heartedly going. This destination is the planet Renewable Economy. China has no real choice, since it is hydrocarbon energy poor and currently lacks the military capabilities to create a global hydrocarbon empire like that of America. Russia is blessed with hydrocarbons; so it has no intention of going anywhere, except into countries which rely upon its hydrocarbons. America has a global hydrocarbon supply chain and a domestic Shale industry that now produces almost as much Oil as Russia and Saudi Arabia. America therefore has one foot in the past, which is held fast by the “Big Oil” lobby and the “Energy Security” lobby. As America “Pivots” towards China, there is however the stimulus for it to eclipse China’s Renewables transformation. The future will clearly be denominated by the country which has Energy Security in terms of Renewables rather than depleting hydrocarbons. America’s armed forces are already successfully making the transformation to Renewables.
Source: Evan Mills, “Electric Grid Disruptions and Extreme Weather, report to the National Climatic Data Center” (May 2012), 2014 The Pew Charitable Trusts
One of the more interesting things that “W” did, whilst he was securing America’s hydrocarbon present after 911, was to legally mandate that the armed forces should go to Renewables[xlii]. America didn’t sign up for Kyoto, however the Pentagon must legally behave as if it was a signatory. America’s military therefore retains its global edge in energy efficiency; whilst the rest of the economy (and the rest of the World) catches up.
This explanation of the “Force” was neatly opined by the aptly named “Globalist” in a post entitled U.S. Energy “Security” — Beware False Comfort[xliii]. Interestingly, or rather conveniently, the article used the sparks of conflict in the Ukraine as the metaphorical spark to ignite a new way of thinking about Energy Security. Hydrocarbon Energy Security is not to be confused with Energy Security per se. Fortunately for America, the son of the man who made the words “New World Order” common in the vernacular, already gave the country the military edge in Renewables. It now falls to his successor to bring the rest of the nation along. The thrust of the “Globalist” logic, is that countries achieve supremacy by extracting the maximum efficiency from energy resources. Hydrocarbon energy resources have now reached the point of diminishing returns, at which further efficiencies and scale cannot be achieved. China has understood this already; and presumably so has the Pentagon.
By the sword we seek peace, but peace only under liberty
The paradigm shift has been neatly conceptualised by Professor James Boyce at Amherst University of Massachusetts[xliv].
“Minds and Hands”
Amherst is just a stone’s throw from the “Minds and Hands” at MIT, where the current cadre of global central bankers received education and their mission in life. Both fonts of learning occupy the shoreline of macroeconomic thought known as the “Saltwater School”. This “Saltwater School” is currently trying to pollute the pure liquidity of the “Freshwater School” of monetarist economics; which has been purified in Europe by the Bundesbank. Professor Boyce’s article seeks peace through liberty by taking the sword to “Big Energy”.
The financial side of the “Force” can be seen as the “Investment” branch of the Economic “Rent” model. The “Parasites” reside on “Wall Street” and the “Productives” on “Main Street”. The environmental side of the “Force” is the “Nature” branch. Both are branches on the same the “Rent” tree which sustains life. Boyce’s thesis concerns the branch of “Nature”; and opines that the entrenched “Extractive” (“Big Energy”) interests are extracting too much economic rent at the expense of the “Protective” (Renewables) interests. To rebalance the “Nature” branch policy makers are raising the price of Carbon Credits, to a level that stimulates direct investment in emission reduction rather than the purchase of cheap credits by the “Extractive” industries. Boyce however fails to explain that this rebalancing also acts as a general fiscal stimulus to the whole economy by stimulating Capex. This stimulus is therefore also felt on the “Investment” branch as well as the “Nature” branch. He also fails to observe that the Fed and other global financial agencies are rebalancing the “Investment” branch with new regulation and capital rules. The “Rent” tree i.e. the Capitalist System is therefore being rebalanced by coordinated activities in both branches; and its growth is being stimulated by Capex in the “Renewable” branch which also leaks into the “Investment” branch.
To put the “Dark Side of the Force” into full context, it is instructive to observe how American electricity consumption has evolved over time since World War II.
When America was industrialising and enjoying scale efficiencies, from exploiting the cheap, abundant domestic hydrocarbons and the abundant supply of “poor tired huddled masses” from the Old World, electricity consumption expanded. As hydrocarbons became scarce and expensive, marginal returns declined and consumption declined; American industry also began to stagnate at this point. The supply of “poor tired huddled masses” was however endless, so scale efficiencies from their exploitation could still be enjoyed; as they still are today.
American policy then became fixated on Energy Security, especially during the Cold War; and the Arab-Israeli Wars which were derivatives of the Cold War. As hydrocarbons became scarcer and more expensive, American industry then responded by investing in energy efficiencies to increase the marginal utility derived from hydrocarbons; which led to a levelling off of the declining consumption curve.
American industry has thus gone from declining consumption, due to secular industrial recession, into declining consumption from efficiency. The graph clearly shows the collapse in electricity demand after the Oil Shocks. It also shows a period of real economic growth circa 1980, beginning after Mr Volcker dialled back the global economy to zero with aggressive interest rate hikes. The first Gulf War and the rise in oil prices since then, created a real contraction in economic growth; and an attendant rise in goods and services prices in lieu of said growth. Central bankers talk about the death of inflation; however this inflation was clearly evident in rising prices for goods and services during this period. These rising prices were enabled by the banks lending to consumers; but this process ended in 2008 and has not restarted despite all the prompting from the Fed’s expanded balance sheet.
The high water mark for oil prices, during the peak of the “Credit Bubble”, with hindsight now seems to have been the tipping point at which the paradigm shift occurred from “Hydrocarbon Energy Security” to “Renewable Energy Security”. Whilst energy prices were rising, American industry extracted productivity by declining the share of production costs paid to labour in the form of wages. Low interest rates have also allowed the use of balance sheet leverage to make the returns on capital employed look attractive.
At the “Zero Bound” however, there is little else that interest rates can do for the returns on capital except to make them more volatile. The big fear in the equity markets, over the “Taper”, represents the concern that the high valuation in equities, based on leveraged return on capital, is now at risk. Janet Yellen is however not Paul Volcker just yet; so equity valuations can hang in there until companies have found new ways to exploit productivity.
Having exploited cheap labour, low interest rates and sweated capital assets to the point of collapse, American industry is now looking at the energy input. The acme of skill is now required for American industry to bring a productivity miracle to the output per unit of energy input; so that the economy can expand whilst using the same (or less) amount of electricity. A new round of Capex is thus under way, which is focused upon energy efficiency driven margin expansion.
In addition, the Obama Administration has called time out on the exploitation of labour. Labour will now be turned into a consumer growth engine via wealth transfer, rather than by forced greater consumption through greater consumer indebtedness. America and China thus “Pivot” around each other, with the maximum degree of “Flexibility”, in order to “Rebalance” the global “Investment” and “Nature” branches of the Economic “Rent” Tree of Life.
The Alpha and Omega
Terminal Velocity 2013
Our monetary Odyssey, which began with Exter’s Inverted Pyramid[xlv], received a new postscript last week. The week before, in “Beyond the Pale”[xlvi], PIMCO’s concentric adaptation of the Pyramid was observed. Last week it was the turn of the “Old Lady” to reinvent the Pyramid. In a mendacious Quarterly Bulletin[xlvii] which included articles entitled Money in the modern economy: an introduction and Money creation in the modern economy , the Bank of England explained how it has not printed money during the QE process; and that the real money printing is a privilege given to the UK Banks. The fact that these UK Banks are now Taxpayer owned, which implies that Government is printing money, was neatly omitted. This money printing can be conceptualised as the layers of the Pyramid above the layer of Government Debt. The article was accompanied by an equally mendacious Youtube video, in order to beam the message to the masses who don’t read what central banks would like them to read[xlviii].
The “Old Lady” Ticks the Boxes
This bulletin coincided with a shakeup of personnel at the Bank, which included the appointment of an Alpha Female[xlix] from the IMF to negotiate the very British “Taper”; and the promotion of another Goldman acolyte[l] to work more closely with the new ex-Goldman Governor. The Bank has already undergone the allegedly radical transformation of employing a “foreigner” as Governor. As we noted in Terminal Velocity (7) “Will the New U.S. Pilot Be Skilled with Helicopters?”[li]:
One should not rush to discount Fischer however, since his candidacy is a classic example of the new political thinking behind “independent” central bank appointments. Developed Market central banks have become politicized, as a consequence of the Credit Crunch and their QE response. They are supposed to be independent however. To give a thin veneer of independence, that fools nobody, politicians have come up with the great optic of hiring head central bankers who are outsiders[lii]. The more unconventional and unorthodox the policy response contemplated, then the more “external” the appointment; the ultimate outsider being a foreigner.
This observation was made before Jackson Hole back in May 2013; when Bernanke was in exit mode and the “Helicopter” landing pad was being marked out. Pilots and crew for the “Helicopter” were under consideration; and the selection process was rigged to favour “foreigners” for the unconventional mission. The capture of the “independent” central bank is an essential precondition, in order for the central bank to enable the permanent creation of money. Such capture of the Fed and the Bank of England is easier to facilitate with foreign agents, like Carney and Fischer. Women are also viewed as “foreigners” in the male dominated world of central banking; so they also become a preferred agency to facilitate capture. In addition, distracting headlines in relation to said “foreigners” and females serve as a great distraction, to cover the more important headline that “independent” central banks have just been politicized.
Once markets become aware of this politicization, all hell breaks loose as inflation expectations get discounted by speculators. Better then to focus on issues of nationality and gender; which promote the global fuzzy warmth of equality and fairness. In the Bank of England’s case, the issue of gender and nationality have been beautifully addressed in one person. Tomorrow’s fish and chip wrappers for Britons, therefore evince the superficiality of these appointments at the expense of the real substance of politicization. This superficiality now extends to the Bank’s embrace of social media via Youtube. “Jobs for the Boys” have now become “Jobs for the Boys and Girls”. The “Boys and Girls” however still play the “Boys’ Games”.
It is therefore with great disappointment that we see that the most radical policy thing the Bank can do is to re-invent Exter’s Inverted Pyramid for the masses, whilst grabbing the headlines with alleged pro-gender equality employment policies. This is however hardly surprising, since Mr Carney bailed out of Canada just at the point at which the higher layers in its own version of the Pyramid were starting to crumble in a real estate bubble collapse.
Rather like the opportunistic Stanley Fischer, who re-invented himself as a central banker after he helped to push Citibank over the brink of solvency into Federal custodianship, Mr Carney has turned a career of banking failure into one of success through deft career management. If the Fed made a Youtube video like the Bank, it would no doubt omit the fact that the Banks (and the GSE’s) are also in Taxpayer custody; so that money is literally being printed by Government in America too.
Both Carney and Fischer have made their moves, based on a tactical understanding of the position of the global economy in relation to Exter’s Inverted Pyramid. Bill Gross has also used the Pyramid with great success during his investing career. Sure enough, the British version of the Pyramid is now using the same model of a real estate bubble, to enable the re-election of the Chancellor who hired Carney, with the “Help to Buy” scheme which is pushing unaffordable British homes to higher valuations. Perhaps it is time to restart the “Housing Smoke and Mirrors” series of reports again!
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