PLAYING WITH AETHER – Investors Reach for the Celestials

One of life’s hardest lessons to learn is that you can only control the controllables. The odds of communicating it are slim to none. It must be experienced to make an indelible, unforgettable mark.

Without a doubt, the world’s central bankers are sitting back in collective horror as they bear witness to Bitcoin mania. It’s akin to a runaway train wreck in the making. There’s no emergency hand brake to pull and the undeniable bubble is fast demoting the dotcom bubble to a history book sideshow. And not a thing can be done to stop it.

You would have thought central bankers would have learned the lesson on the controllables and their nasty sibling, the uncontrollables, during the depths of the financial crisis. And yet when the time came, they found it impossible to restrain themselves.

Monetary policymakers worldwide knew that the longer they kept rates at zero or worse, in negative territory, the higher the prospects for good money being crammed into bad investments. They knew that the odds systemic risk would be unleashed grew with every excess drop of liquidity they pumped into the markets.

Where do policymakers find themselves today? To use a technical term, in a pickle.

Set aside the earnings you hear about and focus on the length of the workweek rising in the November payroll report. Focus your attention on producer prices and you will see they’re running at a six-year high. Take a drive on the highway and pay attention to those 18-wheelers. Most of them say “Hiring Drivers” on the back of them. And ask any manufacturer and they’ll sing the same woeful tune – my cost of materials is going through the roof.

Any way you slice it, pipeline pressures are building. And what do central bankers intend to do about it? Why tighten, of course!

Add it all up and global quantitative easing is stated, as in a public commitment, to halve by this time next year. That was not a typo. We’re going from a record annual rate of $2 trillion in quantitative easing to $1 trillion when you sum the Federal Reserve’s Quantitative Tightening and the European Central Bank’s taper. Even the Japanese look poised to ease off on their ETF binge (you can only buy so much of a market despite what the academics’ models say).

So policy is set to tighten into a speculative mania with contagion written all over it. What could possibly go wrong? Endeavoring to defy nature’s laws is a fool’s game at best and inevitably ends in tears, frustration or worse. You can only control the controllables. Learn it by living it and try your best to not forget it.

For more on the challenges facing investors and central bankers alike as we peer over the horizon into 2018, please link to this week’s installment, PLAYING WITH AETHER: Investors Reach for the Celestials.

With the highest hopes for your holiday party season and wishing you well,

Danielle

 

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THE JOB MOB The Societal Impact of the Next Downturn, Danielle DiMartino Booth

The Job Mob – The Societal Impact of the Next Downturn

Before there was the mob, there was the gabelloti. It would seem that these Sicilian estate managers, employed by the church or feudal lord, were not above corruption.

As the nobility’s penchant for the provocative Palermo night life circa 1700 grew and proper pied-a-terres secured, more responsibilities were handed over to the gabelloti, who were charged with the overseeing of the day-to-day operation of the fiefdoms. A primary task for the gabelloti was ensuring the necessary number of hired hands were satisfactorily shepherding, farming and foresting the lands with which they’d been entrusted.

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Danielle DiMartino Booth, Money Strong LLC, Bitcoin, Blockchain

CRYPTIC CURRENCY — From Blockchain to Daisy Chain and Beyond

W. A. Saltford was a dexterous dandy ahead of his time. In 1898, Vassar College commissioned the Poughkeepsie florist to carry out a cherished charge as the first designated outsider to weave and wield the seminal symbol of Commencement Day, the Daisy Chain.

For the procurement of requisite raw materials, Saltford relied on who else but the “Daisies,” those senior-class designated and specially selected sophomores who scoured Dutchess County for thousands of the long-stemmed flowers. In Vassar’s early days, every graduate merited her share, or to be precise, a 100-pound length of shoulder-draped Daisy Chain. As graduating classes grew, scarce daisy supplies and bench-pressing limitations required Saltford innovate. Regal laurel leaves, he discovered, lightened the load and filled the gaps nicely, much to the Daisies’ delight and relief. Today, the chain is fixed at 150 feet. The alternative, given society’s love affair with liberal arts would be a chain of over 600 feet and some very sore sophomores.

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ATLAS STUMBLES Inequality and Macroeconomics at a Crossroads, DiMartino Booth, Federal Reserve, Money Strong

Atlas Stumbles — Inequality and Macroeconomics at a Crossroads

“If you don’t know, the thing to do is not to get scared, but to learn.” 

“Man’s mind is his basic tool of survival. Life is given to him, survival is not.” 

“I like to deal with somebody who has no illusions about getting favors.”

Red-blooded Americans read these lines and, if in polite company, resist the urge to beat their chests. These mantras say all that need be said of the virtues of honesty, integrity, productivity, grit, independence, pride and liberty itself. Accurately attribute the quotes to Ayn Rand’s Atlas Shrugged, however, and some pause for a moment of reticence, gently reminded of the need to be politically correct.

The need to be ‘PC’ was not even in accepted vernacular back in 1957, when Rand’s book was being vilified by critics. The tome was labeled a testament to hatred and cruelty, a soulless slaying of the welfare state. As fate would have it, a rich rebuttal in the form of a letter to the editor of the New York Times would make history: “‘Atlas Shrugged is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should.”

That the vehement defense was penned by one Alan Greenspan might go down as one of the most malevolent mockeries writ from an era in central banking heralded by the Rand acolyte himself. It rings as impolite in its bluntness, but it was Greenspan who most bastardized Rand’s basic premise, that innovators and producers build model economies.

Every tragedy has a beginning. At the outset of this particular saga was the moral hazard born of Greenspan’s fascination with the stock market. He was literally in awe of those Rand would have characterized as perfect producers, Wall Street’s Masters of the Universe who consumed what they killed. It’s one thing to admire, but quite another to allow yourself to be intimidated when you are tasked with regulating the world in which the Masters reside.

And yet, in the weeks and months that followed the crash of 1987, the newly minted Federal Reserve Chairman directed the New York Fed to leak to bond trading desks the Fed’s plans to inject liquidity into the system. By sanctioning the front running of the Fed, Greenspan had effectively invited the Wall Street’s foxes into the hen house to feast on preordained profits.

Stop and think for a moment about the regime change this heralded, the alteration thrust upon the principle of risk-taking, of markets’ duty-bound and noble tradition of price discovery. Greenspan flipped the very law of nature on its head for those who had been schooled to live and die off the consequences of their trades, come what may. To be shielded from the ramifications of their actions denunciated everything Wall Street did and should represent.

And yet, here we are, 30 years later. Thanks to the bounteous harvest of moral hazard sown by Greenspan’s original sin, far too many of Wall Street’s innovative producers have devolved into the looters Rand so decried in her tribute to capitalism. Rather than create anything of lasting value, today’s Wall Street leeches what it can from the bottomless, fetid supply of the moral hazard manufactured by central bankers.

If only it just ended there it would be bad enough. But politicians long ago opted to tie their fates and fortunes to the same poisoned central bank dealer. As far as they’re concerned, the monies that keep them in office need be fungible and nothing else.

And so, the Stygian tale turns, sustained by trillions upon trillions of dollars of debilitating debt taken on along the way. The central banks print money. The investment banks pocket fees. The tab swells. Add it all up and global credit sums to $220 trillion today, up from $150 trillion at the onset of the financial crisis. Narrow your focus to the four largest developed markets, those most active on the money-printing stage, and you find that $34 trillion of debt has amassed since then. Call the chart below simple if you will, but sometimes one line says more than enough.

Sum of Central Bank Balance Sheets and
Cumulative Budget Deficits for the United States,
Eurozone, the United Kingdom and Japan ($Trillions)

CENTRAL BANK ASSETS

In the words of the Deutsche Bank analysts who created the graph: “Another way of looking at this is the extra amount of stimulus over and above living within our means (no money printed, no deficits) seen since the Great Financial Crisis. In the end, $34 trillion of stimulus and Quantitative Easing has delivered very low growth, subdued inflation and sky-high asset prices around the globe. This is unprecedented territory and how can anyone estimate what the fallout will be when we normalize again?”

In all actuality, the very same Deutsche analysts answered their own question in the same report that produced that daunting chart above, of debt built to nowhere, akin to that pork-financed bridge, also to nowhere, so pilloried in the media years ago. The fallout will be anger — unprecedented, immeasurable levels of unrequited anger among the masses that know all too well that the economy’s designated producers have become looters, robbing them of a passageway out of the hell on earth they’ve come to know as subsistence care of entrepreneurship and innovation succumbing to slow, sad deaths.

Populism itself is coming home to roost and it will present itself as the macroeconomic challenge of the ages.

No doubt, ‘populism’ is a subjective force, all but impossible to quantify. Thankfully, that didn’t stop the Deutsche analysts from giving it a go. To wit, they weighed populist votes and population size in seven large countries over the last century, specifically those of France, Italy, Spain, the United Kingdom, Japan, Germany and the presidential elections within the United States. Qualifiers included parties that espouse communism, nationalist policies tied to immigration and militarism and leaders with dominating, charismatic personalities rather than well-defined policy positions. In Europe, anti-NATO and Euro-skeptic tendencies were also captured while in the United States, anti-corporate progressives that defied the establishment made the cut.

It’s noteworthy that these general themes, in one form or another, have withstood the test of time, answering the question as to whether we can’t all just get along. (Apparently not.)

Discount what you will. Net out what you like. No matter how you slice it, prior to the last decade, populism is off the charts. No period in modern history compares to what we’re witnessing today save the epoch set off by the stock market crash of 1929 that culminated with World War II, with, by the way, the Great Depression sandwiched in between.

Populism Index Against the Backdrop of
Developed Market Financial Crises

Populism index

Hats off to the team at Deutsche for resisting hyperbole in the face of the immutable message delivered in the graph: “While the consequence of the recent rise in populism hasn’t yet destabilized financial markets, the level of uncertainty will surely remain high while such parties remain realistic power brokers in major national elections. (Populism’s) rise surely increases the risk to the current world order and could set off a financial crisis at some point soon.”

It’s that last point that finally brings this week’s subtitle into context. The gravity of populism’s root cause, inequality, is no longer purely political tinder. It’s all about the economy.

The good news is the beginnings of an epiphany is dawning on the have’s. Mega hedge fund magnate Ray Dalio in particular, a man whose net worth crests $17 billion, has voiced concern. In a recent interview, Dalio said that he thought inequality was the most daunting challenge on the horizon, one on par with the period from 1935-1940.

“If you carve out that lower 40 percent, not only has there been no income growth, but death rates are rising because of opiate use, suicide and because they’re losing jobs,” Dalio said. “This is the biggest issue of our time – the biggest economic issue, the biggest political issue and the biggest social issue.”

Dalio is right. And though he’s gone as far as saying the Fed is poised to commit a policy error akin to 1937, he’s not vociferous enough in his criticism of Fed policy for engineering the fine mess in which the country finds itself.

Thankfully, I’m not alone in my indictment of the Fed. In the words of an economist worthy of the deepest respect, Judy Shelton, Janet Yellen’s concern for the plight of the forgotten masses is, “rich.” I recently caught up with Shelton and she had this to say, in a clear rebuttal of the fawning accolades being showered on Yellen as her time at the Fed comes to a blessed end: “While it’s nice that Janet Yellen cares about the issue, I think she should have been more forthcoming in acknowledging the Fed’s own role.”

Shelton’s eloquence shines through in Beware a Magnanimous Fed, an opinion piece she wrote three years ago in reaction to the following naïve statement made by Yellen:  “Although we work through financial markets, our goal is to help Main Street, not Wall Street.” Shelton’s reply follows.

“The problem with Yellen’s public display of benevolent concern over income and wealth inequality is that it implies she means to do something about it. This is worrisome because she views the Fed as a force for good rather than as a distorting government interloper into private-sector credit markets whose clumsy efforts skew financial rewards to savvy corporate strategists and sophisticated investors.

If Yellen wants to restore the free-market values rooted in our nation’s history, she needs to pay heed to the telling correlation between wealth inequality — at its highest level in the past 100 years, higher than for much of American history before then — and the creation of the Federal Reserve in 1913. It’s unbecoming to preach the virtues of equality of opportunity when Americans see only too well who most benefits from monetary favoritism and who is most punished by the inequality of access to vital financial capital.”

It’s doubtful Ayn Rand herself could have said it better. Shelton’s refutation of Yellen’s premise is all the more prescient given the results of the presidential election. The masses may not be able to identify zero interest rate policy and quantitative easing as culprits by name. But their actions speak volumes to their shared revelation that the enemy has been identified and it is indeed within.

As for any aspirations to attain the American Dream, they’ve long since been crushed by repeated iterations of subprime debt illusions ending in tears. Call the two dichotomous headlines from the November 15th issue of the Wall Street Journal Exhibits A & B: Household Debt Hits a New High and More Americans Feel Like a Million Dollars.

If you haven’t yet got the picture, it might be time for a courtesy call to your friendly neighborhood ophthalmologist. As for what lies ahead, populism appears to be taking a nasty turn for the worse. And though the problem is clearly as close to home as it can be, our shared national dilemma is anything but local.

Look no further than my paternal family’s homeland. Radical no longer suffices for the long-repressed Italians seeking relief at the polls. The far right, it would appear, is now rearing its hateful, ugly head. Be on the lookout for more of these headlines as oppression spreads in the way only nasty infestations can.

On a more practical level, it strikes me as untoward to bandy about investment ideas while pondering such heavy prospects. If you’ll indulge me some grace, it’s safe to say defense contractors will have no challenge keeping the lights on in the years to come.

In the end, our collective deliverance can only come from strong leadership that refuses to balk at the grave challenges that lie ahead. To call one last time on Rand’s sagacity, “Evil is impotent and has no power but that which we let it extort from us.”

 

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DANIELLE DiMartino Booth, Commercial Real Estate, Federal Reserve, Restaurants

Congestion Indigestion – The Future of the Restaurant Industry in America

Oh how Mrs. Howe’s heart burned. Literally.

And so, her dutiful hubby descended to his basement where he concocted a remedy of calcium carbonate and sugar for his bride, much to her relief. And much to Jim Howe’s financial delight, his made-at-home remedy caught on like wildfire, extinguishing heartburn, neutralizing acidity and digesting indigestion far and wide. Could it be that the excesses of the Gilded Era were just what the pharmacist ordered in 1928? Or perhaps it was the hangover that set in the following year?

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Destination Reformation — The Dawn of a New Era in Central Banking

Combine contraband coffee, paralytic guilt and a gift for translating Greek and you too can change the world. Such was the case with a young, deeply devout Catholic by the name of Martin Luther in the year 1516.

A decade after he traded academia for the priesthood, Luther found himself disturbed by the quid pro quo nature of Catholicism. Sin expunged via penance in increasingly pecuniary form struck Luther as graceless at best. A field trip to Rome only served to dial up his unease as the ornateness on vivid display communicated dishonesty and even vice. That this epiphany coincided with the first trickles of coffee into Germany was fitting given what was to come.

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Jay Powell – A Quiet Leader

The sheer breadth of Powell’s experience is refreshing compared to what we’ve had for the past 30 years. Powell has a deep understanding of the law and politics. He worked in the Treasury Department under Nicholas Brady and was confirmed as Undersecretary of the Treasury under George H.W. Bush. His background in politics and the experience he has had at the Fed thus far have prepared him well for his role as liaison to Congress and the White House.

Powell’s experience as an investment banker was critical in his carrying out the investigation and sanctioning of Salomon Brothers. Understanding the entirely different type of politics that exists in big banks will bode well for his capacity to regulate the banks. This attribute especially will dilute the power traditionally exerted by the NY Fed in recent years, a District that has a long history of conflicts of interest vis-à-vis the banks it regulates. A stronger regulator as Fed chair in the years leading up to the financial crisis would have been able to recognize many of the markers the economists missed.

At the Carlyle Group, Powell founded and ran the Industrial Group within the Buyout Fund. A separate missing characteristic among Fed leaders for the past 30 years has been a woeful lack of understanding as to how Fed policy effects corporations and the decisions CEOs and CFOs make driven by Fed policy, the most obvious of which has been debt-financed share buybacks at the expense of capital expenditures.

Some in the media have questioned Powell’s being the wealthiest individual at the Fed. That is actually a strong suit. In his work between 2010 and 2012 at a bipartisan think tank, Powell worked for a salary of $1 per year to carry out his mission to raise the debt ceiling. His wealth affords him the luxury of having no preset agenda. His history of working for his country exemplifies that he is at the Fed because he truly believes he is doing a greater good in servicing his country.

Powell’s work on Too Big to Fail banks also speaks to his ability to be independent and objective in his approach to regulating big banks with deep-pocketed lobbyists who hold huge sway over politicians. If he is willing to go up against the biggest banks, he will hopefully prove to be a leader cast in the mold of William McChesney Martin, the longest serving Fed Chairman famous for testifying to Congress that it was the Fed’s job to take away the punch bowl just as the party gets going.

His being a member of the Republican party is a sign he will be less apt to encourage further mission creep at the Fed in its fulfillment of its second mandate to maximize employment. Dovish leaning Fed chairs have induced financial instability time and again in their efforts to bring marginal workers off the sidelines. The busts that have followed though have done greater damage to the labor market. His experience in the financial markets suggests he will be less apt to keep rates too low for too long as has been the case with his three predecessors.

Powell was not in favor of the third round of QE, but voted for its nevertheless. This is his biggest black eye and why market participants perceive him to be as dovish as they do. One can only hope that the quiet leader will have the strength to not only act more independently, being faithful to his convictions, but also to encourage dissent on the Board of Governors which has been absent since 1996 save two dissents.

I lean towards the Bloomberg Intelligence Fed Spectrometer which rates Powell as neutral rather than a hawk or a dove. Or as the man I used to call boss, Richard Fisher, would say, Powell is a (wise) owl. The notion that an intelligent man who has studied economics assiduously since joining the Fed is unfit to lead because he is not a PhD in economics is naïve and utterly preposterous. His not being an academic is possibly his best attribute given he will be battling the next recession and the financial markets disruption that is sure to accompany it.

 

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FINDING NEOM, DiMartino booth

Finding Neom: The Future of Black Gold

Sometimes you have to lose nearly everything to focus your attention on what’s most important, even if you’re a clownfish.

But then it’s not every day a barracuda massacres your entire family, save one damaged egg. Lucky for all us moviegoers, it was Nemo who eagerly emerged from that egg, the big screen’s most beloved orange-striped fish, damaged right fin and all. Not surprisingly, such trauma drove Nemo’s father to helicopter parenting, to the extent such proclivities are possible…underwater…on the Great Barrier Reef. On the other hand, anything is conceivable in animated features. Such was the case nearly 15 years ago with Disney’s release of Finding Nemo.

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DiMartino Booth, China, Policy, Economy

Dim Sums: A Fork in the Silk Road

Two centuries before Christ and millennia before truck stops, there was Dim Sum along the Silk Road. What, after all, could possibly best tea houses with nibbles to break the monotony of a 4,000-mile journey from Xi’an to the Mediterranean and back?

The tradition of Dim Sum is rooted in the revelation that drinking tea helps the digestion process, which prompted the introduction of bite-sized dishes to stand as accompaniments. It’s easy enough to envision the warm feeling those beckoning tea house silhouettes over the horizon elicited, the same sensation stimulated by the Golden Arches today.

 

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THREEofTHREE, Danielle DiMartino booth, Money Strong

Pricing in Perfection: Three out of Three?

We know two out of three ain’t bad. Does that render three out of three perfection itself? The history of the number three certainly suggests that to be the case. Little did we know that three is the first number bequeathed ‘all-encompassing’ status.

True Triads come in many familiar forms including the Father, Son and Holy Spirit; the beginning, middle and the end; the heaven, earth and waters; the body, soul and spirit; and last but certainly not least — life, liberty and happiness.

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