No-one knows where we are: The next 6 weeks of 2016
64 weeks ago

No-one knows where we are: The next 6 weeks of 2016

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My last post was published just before Valentine’s Day…and now I’m back at Easter time . . . just 6 weeks later. Both events, in different ways, represent the triumph of optimism over reality and this is where I think the world is right now.

On one day, 10 March 2016 I was confronted by three headlines:

IMF call for global action to avoid economic derailment. REALLY . . . what do they think has been happening for the last 4 years? A bullet train to growth?

Draghi lays down the gauntlet to policymakers. Apart from the fact that gauntlets are generally thrown not 'laid' down in the form of a challenge, and its medieval in origin, just how can boosting credit and liquidity through the form of ultra-cheap long-term loans, known as, get this, TLTROs (targeted long-term refinancing operations) be a threat to anyone other than us, the schmuck taxpayer, who is going to being paying these off for decades. Hang on, I got that wrong, we’re going to be paying them off forever and our children might, just might not have to as well.

And, I have this sneaking suspicion that the TLTRO is not dissimilar to a CDO or or any other ‘instrument’ that ends in ‘O’.

The really scary part of this is that the expectation of more liquidity (aka schmuck debt) helped the US share market achieve its fourth consecutive weeks of gains. We are in really deep pooh if the world gets excited about a four-week trend…which is one reason I think I’ve opted for a 6-week commentary.

Negative interest rates high on ECBs agenda

Yet another article about the tough-talking Draghi who I now think is trying to channel a more benign version of Svengali to find a way, any way through the global malaise we’re now all in economically.

Unintended consequences

The problem with this is that there are, and there always are, unintended consequences. In this case negative interest rates are:

  • Leading to higher not lower mortgage rates in Switzerland
  • Impacting on the financial stability of banks as shareholder and hedge funds worry about the damage to their profit margins (and rightly so)
  • The impact on those companies and institutions with long-duration liabilities such as insurance companies and pension funds
  • Their use as a currency manipulation tool – oh no, really…governments wouldn’t do that, would they?

On the last point, just look at the Australian dollar. Now back in the mid-70s in relation to the US dollar even after the Chinese-led mining boom has gone. It reflects the impact of the monetary policies of the major central banks . . . the ones that have run out of ideas and want to do the Central Bank version of the CDOs of the sub prime era and even lack the imagination to call them something different. They’ve just added a few letters to make it look different.

In Australia, the general population is known as ‘the punter’. It comes from the racing vernacular but has a much wider application now. The general public, voters are called ‘the general punter/the punter.

The general punter in Australia is pretty complacent right now. We dodged the GFC bullet, no recession; mining investment has vanished yet somehow other parts of the economy seem to be picking up and unemployment is under 6%. We understand there is a budget problem but we’re really not sure how much of a problem it is as our politicians seem to be all over the place (in helicopters sometimes) about whether this thing called the deficit is serious or not.

And then there’s this complete farce that is our Federal Parliament that doesn’t actually seem to be doing anything other than discussing ways to restructure itself. That said, this is pretty important for Australia’s future, but it does lead in well to why helicopters and DD is important…well at least here in Australia.

Calling a helicopter a helicopter

I’ve also had to do a rethink on a couple of terms that in the past were used to describe something completely different that what I have come to know. The first is the analogy of the helicopter . . . and this is in no way a reference to the former Australian Speaker of the House who rather misused this form of transport and lost her job.

Helicopters where often used in the 1990s-2000s to describe over attention/even smothering parents, as in the description helicopter parenting. Now I’m reading about it in terms of a possible and credible economic policy, as in helicopter money. Given I only studied economics for one year at university I never got to Milton Friedman’s first use of the term rather it’s popped up in our financial press over the past two weeks.

I am indebted to the CIS for providing a clarification of Milton’s words. They noted that: ‘It is true that he hypothesised about the economic effects if ‘one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community’. But Friedman wasn’t proposing the use of helicopter money at that time — merely using it as a hypothetical illustration of the powers (and dangers) of monetary policy — and there is no reason to think he would propose it now.’ https://www.cis.org.au/commentary/articles/helicopter-money-cant-rescue-stranded-economies

But, you don’t need to be an economist or central banker to work this one out.

Everything else has failed so governments are simply going to throw money at the populations . . . preferably from helicopters as it’ll be spread further rather than being hoovered up by the already bloated currency and hedge fund traders. I’m joking I do understand that governments won’t use actual helicopters, but I am more concerned that governments really have no idea about what to do next.

Everything they’ve tried to date has failed . . . massive fiscal stimulus, zero policy interest rates. quantitative easing (QE) and negative interest rates.

But then I happened upon Ray Dalio’s comment at Davos in January. Woe is me…I am just not a mover/shaker enough to a) be invited b) able to afford to attend, so I get the press reports. Here’s a good one from Reuters.

‘Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, says the next big monetary and fiscal move should include an airdrop of money from helicopters to stimulate the U.S. economy.’ http://www.reuters.com/article/us-funds-bridgewater-dalio-idUSKCN0VR0EH

I was planning to put an image of a helicopter with this post but have changed my mind, so now you have Ray and his version of the difference between what he makes and the rest of us will need to pay forever because he likes…you guessed it, helicopters.

DD

The second term I’ve had to make an adjustment to is DD. It’s currently all the rage in Australia although various versions are now appearing through Facebook as to what it means in other countries.

Up until about a month ago DD to me was a reference to the cup size of a bra. You know they go from A up to (well I’m not sure to be honest). Now, however, everyone is using the term as it refers to a Double Dissolution of the two houses that make up our Federal Parliament. To be honest we’re all just wishing our Prime Minister would call the election so he and we can all get on with sorting out how we manage our way through what looks increasingly like the recession Australia has avoided so far but has to have.

And we now have input from others as to DD. The US is headed for a Double Disillusion election while the UK is having a Double Disaffection vote in June.

The best I can get out of the last 6 weeks is a few statements from Frank Gelber from BIS Shrapnel who has said:

‘The low dollar is absolutely crucial to driving forward structural change.’

Great, I agree with that but the ECB and the rest of the world on another trajectory altogether I’m not going to hold my breath on that one.

Then he said, ‘We are on the threshold of major structural change.’

Oh! I get it now. It’s the DD structural change.

Just like a bra changes the structural shape of that certain part of women’s anatomy the Australian economy – and the world economy –needs the equivalent of, in the words of the incomparable if not slight risqué Bette Midler in the movie Beaches in the song Otto Titsling the ‘over the shoulder boulder-holder’ . . . although for the world it’s the get ‘over the debt binge, constant growth, world order’. Poetry was never my thing, obviously.

Here’s the link to Bette’s song from the movie.

https://www.youtube.com/watch?v=xqxWhBZXF8Q