*** denotes well-worth reading in full at source (even if excerpted extensively here)
Economic and Market Fare:
might be worth a reminder here that not everything I post excerpts from or links to is something I agree with, just something that I think warrants consideration:
Louis-Vincent Gave, co-founder and CEO of Gavekal Research, talks about the most important investment topics in the new year and reveals where he would invest now.
.... Most people think of the Fed as having two mandates: price stability and employment. But it actually has a third mandate that nobody ever talks about: Making sure the Treasury market stays functional to make sure the US government gets funded. Which one of these three is the most important? If push comes to shove, they won’t be able to make a choice. The Fed will have to keep the government funded. Looking at the numbers, you see that the interest expense on US debt over the next couple years, with the rollovers that need to happen, will rise from $900 billion to $1.4 trillion per year. Spending for Social Security is roughly $2.2 trillion per year. Tax proceeds in a non-recession year are about $4 trillion. So, rather soon, Social Security and interest expenses alone will basically make up all of the tax receipts. There will come a point where the Fed just can’t raise interest rates further. They need to keep the government on the road, and without printing money, without lower interest rates, the Treasury market will melt down.
Given that view, you would still avoid Treasuries?
Very much so. I think OECD government bonds in general are the most dangerous asset class. They are fundamentally condemned. OECD government bonds are the most overowned asset class with no future whatsoever because most governments have lost the ability to increase their revenue through increases in taxation. The only way these debts can be paid off is through structurally higher inflation and financial repression. ......
this excerpt is another excellent example of something that sounds intelligent but is mostly B.S... speculative bubbles have come and gone and come and gone for centuries and hardly require low govt bond yields; but, fwiw:
Book Review: The Price of Time by Edward Chancellor
What Is the Ideal Interest Rate?
... After justifying the legitimacy of interest, Chancellor proceeds to demonstrate the effects of different interest rates throughout economic history. In general, lower interest rates indicate a more advanced, stable economy. However, once interest rates go below about 3%, investors get antsy about their income. No one wants to bleed down their principal, and no one, and certainly not most rich people who derive social status from their wealth, wants to endure even a temporary lifestyle downgrade from less income. One is reminded of Machiavelli’s dictum that a man will hate you less for killing his father than the humiliation of losing his fortune. So when interest rates go below 3% and especially as they approach 2%, investors become desperate for higher yields. This creates an environment where speculative bubbles become attractive, which become self-reinforcing as they grow. These bubbles conveniently always come packaged with a plausible narrative that explains why the speculative asset is not a bubble but rather a world-changing economic innovation. Sometimes these narratives happened to be true, such as the economic revolutions associated with railroads and automobiles, but bubbles arose when way more capital entered an “obvious” opportunity than could possibly make a decent return on investment, while sometimes they are mostly cons like John Law’s Mississippi scheme, Holland’s tulip bubble, or cryptocurrency. Those who remain in safe assets get to feel dumb and poor while everyone else makes a mint, for a time. When your buddy doubled his money last year in crypto, it's easy to feel like a loser sitting on bonds yielding 2%.
The 2022 Globie: Money and Empire
................. Kindleberger offered yet another perspective on financial instability in his Manias, Panics and Crashes. As the title implies, the book is an account of financial crises dating back over time and their common elements. The book was first published in 1978. Robert Aliber took over the job of updating the book after Kindleberger’s death, and the latest edition (the eighth) has Robert N. McCauley as the newest co-author.
In the book Kindleberger extended Hyman Minsky’s model of financial instability, which was a domestic model, to include an international dimension. Minsky had proposed that credit expansion and contraction followed a cycle of initial displacement, boom, euphoria, profit taking, and panic. In a global context, this cycle can be amplified by short-term international capital flows, that increase the amount of credit that is available during the early stages of the cycle. But the money is rapidly withdrawn by foreign investors when doubts arise about the solvency of the projects they have financed. The withdrawal of foreign capital exacerbates the instability of the last stages of the cycle. Kindleberger’s adaptation of Minsky’s work proved to be remarkably prescient during the emerging market economies’ crises of the 1990s, such as the Asian crisis, as well as the global financial crisis.
Mehrling, therefore, has done a valuable service in explaining Kindleberger’s contributions to our understanding of the global economy. Because his analyses were not based on mathematical models or econometric testing, Kindleberger did not receive the same degree of respect as did his colleagues at MIT and elsewhere who used these tools. But the passing of time demonstrates that Kindleberger possessed a keen understanding of how capital and credit flows functioned, and the need for some form of governmental oversight. Any lack of attention to this work at the time when Kindleberger was active tells us more about the blindfolds of economics than it does about Charles Kindlberger.
“I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.” (Fisher 1933, p. 341)
Fortunately, unlike Krugman, Fisher recovered from this mental illness.
Quotes of the Week:
1:
My updated #CPI #inflation forecast for the December reading (released 1/12):
— TheHappyHawaiian (@ThHappyHawaiian) December 30, 2022
6.7% Headline
5.6% Core
Monthly that's -0.1% and +0.1% respectively
Seeing outright negative prints in a few of the individual categories now as shelter continues higher pic.twitter.com/Fc9ikPGjPk
Bubble Fare:
"There's still a chance we can avoid a hard landing if the Fed pivots in December"
Exactly. But the Fed didn't pivot in December. So now what do bulls expect? They expect a Fed pivot and soft landing to come in 2023 instead. And a pony to go with the horse shit.
No comments:
Post a Comment