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Pater Tenebrarum

Pater Tenebrarum

Acting Man has been named after the title of the first chapter of Ludwig von Mises' book "Human Action" - the best treatise on economics ever written. The blog's main author is Pater Tenebrarum, an independent analyst who has been involved with financial markets for 34 years and is writing economic and market analyses for independent research organizations and a European hedge fund consultancy.

Articles by Pater Tenebrarum

US Financial Markets – Alarm Bells are Ringing

January 17, 2017

A Shift in Expectations
When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump’s election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election result has strongly boosted certain market expectations.

The chart below compares three of the associated ETFs, namely SPY, TLT and GLD:

SPY, TLT and GLD – after the election, stocks rallied while treasuries and gold sold off. The main (but not only) driver of these moves were surging inflation expectations. Since mid December, treasuries and gold have quietly rallied though, in what seems to be widely considered a “technical bounce” one is usually advised to ignore (we won’t) – click to enlarge.

As we have mentioned late last year, US true money supply growth rates have accelerated sharply again. Since the stock market has concurrently broken out to new all time highs, its strength deserves some respect for now, despite the fact that valuations are extremely high.

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India’s Currency Debacle

November 24, 2016

A Major Crisis
Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details).

Banned 500 rupee banknotes
The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has certainly created fresh avenues for corruption – which should have been expected (whether it will succeed in its aim of stamping out other types of corruption remains to be seen – we doubt it).
Physical Gold & Silver in your IRA. Get the Facts.
Moreover, the poorest of the poor are suffering the most on account of the

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A Striking Chart

September 16, 2016

The Economy and the Stock Market
As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth.

What’s left of the Brooklyn Domino Sugar Refinery.
Photo credit: Paul Raphaelson

Contrary to what one often hears from central bankers and their courtier economists, we cannot consume ourselves to prosperity. Rising consumption is a possible effect of economic growth, not a cause of it. Debt-funded capital consumption promoted by loose monetary policy can only lead to impoverishment.
Our friend Jonathan Tepper of Variant Perception (VP) is doing a lot of excellent and highly creative econometric work. It is  strongly focused on the discovery and creation of proprietary leading indicators that can provide actionable information to stock market investors.
In the course of an email discussion with him and several others on the above-mentioned topic, he has provided a number of charts developed by VP that bring the current weakness in a number of economic data into context with the stock market’s performance.

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Curious Pattern in ISM Readings—But Still Getting Weaker

September 8, 2016

Head Fake Theory Confirmed?
This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output.

Pepsi factory in Baltimore, 1956
Photo via

Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing surveys and the national ISM survey. With the release of unexpectedly weak ISM data in August, this gap has begun to close noticeably (“unexpectedly” is meant to indicate that it wasn’t expected by the consensus of mainstream economists).
Both manufacturing and services ISM data were weak, but we will focus on the manufacturing survey. Readers may recall a chart from our last update provided by our friend Michael Pollaro, which shows the behavior of the ISM survey’s new orders index vs. the annual rate of change of industrial production lagged by six months.
Just prior to the last two recessions, the two data series developed in a manner that looked very similar to the recent pattern. In particular, there was brief recovery in new orders in both cases just before the economy fell into recession.

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A Convocation of Interventionists – Part 1

September 7, 2016

Modern Economics –  It’s All About Central Planning
We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context.
Central bank headquarters: the Fed’s Eccles building, the ECB’s hideously expensive new tower in Frankfurt, and the BOJ’s Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes).

When discussing papers and speeches delivered at the annual Jackson Hole meeting, it is important to consider the wider socio-economic context. As this article suggests (still the most recent reference available on the topic), the Federal Reserve has essentially bought off the economics profession.
A great many US economists list “monetary policy” in some shape or form as a specialty, or more generally, “macroeconomic policy formation and aspects of public finance”. More than half of the editors of the top seven academic economic journals are on the Fed’s payroll and serve as gatekeepers. The Fed employs hundreds of economists directly, and provides 100ds of millions of dollars in grants to outside economists.
We are quite certain that the situation in other countries is very similar. It is easy to see why practically no fundamental criticism of the monetary system is forthcoming from the economics profession.

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A Convocation of Interventionists, Part 2

September 7, 2016

Pleas for More Deficit Spending
We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there.

Assembled central planners (we’re not sure if this picture was taken at the conference, but most of the people in it were there).
Photo credit: Getty Images

We should preface the following with a Mises quote, as the simple concept he remarks upon below is apparently not well understood by the people running the monetary GOSPLAN show (which doesn’t say much for them).

“[T]here is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of its quantity.”

One would think that this should be rather obvious, but apparently it hasn’t been emphasized often enough since 1949 when the above sentence was first published. Why else would we read the following about the Jackson Hole meeting:

Central bankers in charge of the vast bulk of the world’s economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.

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Gold Sector Correction——-What Happens Next?

September 1, 2016

The Long Awaited Correction is Underway
The gathering of central planners at Jackson Hole was widely expected to bring some clarity regarding the Fed’s policy intentions. This is of course a ridiculous assumption, since these people have not the foggiest idea what they are doing or what they are going to do next. Like all central planners, they are forever groping in the dark.

Hi there! Stanley Fischer finds chief central planner Janet Yellen deep in the bowels of the Eccles building. In Jackson Hole, they played “good cop, bad cop”.
Photo credit: Federal Reserve / Reuters

Nevertheless, financial markets keep reacting to their words as if they actually meant something – and of course we have to deal with that reaction, regardless of how irrational it is.
As we have mentioned many times during the gold bear market from 2011 to 2015, it was primarily the threat of a rate hike that put pressure on gold and supported the US dollar. We argued that once the Fed finally dared to implement a baby step rate hike, gold would very likely rally in a “buy the news” type response – which indeed happened.
Ms. Yellen’s speech at Jackson Hole (we will post a little post mortem on that gathering of interventionists soon) was still deemed non-committal enough by the markets. Her deputy Stanley Fischer attended the event as well though, and he started mumbling something about rate hikes.

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US Presidential Election –—-How Reliable are the Polls?

August 30, 2016

Is Clinton’s Lead Over Trump as Large as Advertised?
Once upon a time, political polls tended to be pretty accurate (there were occasional exceptions to this rule, but they were few and far between). Recently there have been a few notable misses though. One that comes to mind is the Brexit referendum. Shortly before the vote, polls indicated the outcome would be a very close one, while betting markets were indicating a solid win of the “remain” vote. The actual result was around 52:48 in favor of  “leave”, so this was quite a big miss.

Polarizing candidates – one of whom has already managed to confound election forecasters in the nomination race.
Image via

Another case that confounded even the most seasoned forecasters was the race for the Republican nomination. See for instance this article by Mish from January, in which he rightly berates famous election forecaster Nate Silver for vastly underestimating Trump’s chances to win. Silver held them to be around 12% to 13% at the time, which turned out to be a miss of truly monumental proportions. He kept missing the mark for many more months to come (essentially until the point in time when Trump had made the transition to “inevitable nominee”).
We currently follow press coverage on the presidential election only cursorily, for lack of time, and also because it seems both very superficial and one-sided.

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Insanity, Oddities and Dark Clouds in Credit-Land

August 13, 2016

Insanity Rules
Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn’t matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.

The perfect investment for modern times: interest-free risk!
Illuustration by Howard McWilliam

A huge mountain of interest-free risk has accumulated in investor portfolios and on bank balance sheets. Globally, more than $13 trillion in sovereign bonds trade at negative yields to maturity. In spite of soaring defaults, junk bond yields have collapsed again as well. In short, insanity rules in the bond markets.
A recent article in the FT informs us of “a wave of foreign demand for US corporate debt”:

Record-low interest rates are no barrier for US companies finding buyers for their debt thanks to a relentless global quest for fixed returns that shows little sign of easing. The pace of US corporate debt sales — which has not been fast enough to quench investor demand — is expected to continue unabated driven by foreign buyers in a world where roughly $13tn of sovereign and corporate debt trades in negative territory.
“It is a low return world,” says Ed Campbell, a portfolio manager with asset manager QMA.

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Meet The BOE’s Mark Carney——-Another Central Banker Wrecking Ball

August 9, 2016

Mark Carney, Wrecking Ball
For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame).

This is how Mark Carney is seen by the press. A few decades ago no-one would have thought that the drab bureaucrats inhabiting central banks would ever get this much attention, and yet, here we are. It’s like living in a really bad B-movie.
Cartoon via

The adulation he receives is really a major head-scratcher. What has he ever done aside from operating the “Ctrl. Prnt.” buttons? As far as we are aware, nothing. As we have discussed previously, his main legacy is that he has left Canada with one of the greatest and scariest real estate and consumer credit bubbles extant in the world today. Some accomplishment!
With respect to his economic analysis, it seems not the least bit different from the neo-Keynesian/ semi-monetarist mumbo jumbo we get to hear from central bankers everywhere. This is by the way no surprise: they’re an incestuous bunch and have largely received their education at the same institutions.

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US Economy Update——A Lot Of Indicators Say Something’s Not Right

August 8, 2016

Another Strong Payrolls Report – is it Meaningful?
This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong?

Quo vadis, economy?
Image credit: Paul Raphaelson

As we usually point out at this juncture: apart from the problem that US labor force participation has collapsed (i.e., millions of unemployed people have been defined out of existence), employment is a lagging economic indicator.
Nevertheless, payroll data and initial claims usually tend to give some advance warning ahead of recessions. As long as they remain strong, it is fair to conclude that a recession is probably still a few months away at a minimum. Note though that the warning signs from these indicators usually come very late in the game.

Monthly change in non-farm payrolls: two strong reports in a row. As Mish notes, at least one market does not believe the message – rate hike odds barely increased – click to enlarge.

Initial unemployment claims: the last recession began officially in November of 2007. There was very little warning from employment-related indicators – claims only started to perk up a little in Q4, but it was not clear in real time whether this was a meaningful move – click to enlarge.

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D-day for Australia’s Real Estate Bubble—-Unknowable Degrees of Insanity

August 1, 2016

Unknowable Degrees of Bubble Insanity
Back in February, we brought you an update on the truly insane real estate bubble in Australia (see: “Australia’s Housing Bubble – In the Grip of Insanity” for details) in the wake of Jonathan Tepper of Variant Perception reporting on an eye-opening fact-finding tour in Sydney.

This rotting shack in Sydney and its tiny plot of land sold for nearly $1 million in May of 2014 – more than two years ago.  Since then, house prices in Australia have increased even further. Yes, it is an insane bubble, no doubt about it.
Photo credit: Attila Szilvasi

As every seasoned market observer knows though, the fact that a bubble has  obviously attained crazy proportions does not mean it cannot become even crazier. We only need to think back to the Nikkei index in the late 1980s, the Nasdaq in the late 1990s, or the grand-daddy of modern-day bubble insanity, the Souk Al-Manakh bubble in Kuwait in the early 1980s.
The latter example is generally less well known than the others, but it is unsurpassed in terms of sheer mass dementia.

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Hillary’s Speech On “Inequality” And The $12,500 Armani Suit It Came In

July 27, 2016

Champion of the Downtrodden?

“Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”
– H.L. Mencken

A mass e-mail has been making the rounds lately, and it is quite possible that many of our readers have already seen this. For those who haven’t, we wanted to share this moment of hilarity provided to us by Deep State candidate Hillary Clinton. It revolves around this picture:

Hillary Clinton delivers a speech – the topic was reportedly “inequality”.
Photo credit: Getty Images

Hillary Clinton has actually managed to make a rip-roaring business out of her life-long occupation as a bureaucrat-politician. For instance, companies like Goldman Sachs are reportedly paying her speaking fees of up to $250,000 for a single speech. Admittedly, we have never heard any of the speeches she delivers at assorted corporate gatherings, but it is a very good bet that their content is actually not worth $250,000.
One wonders why private companies would spend this much on what very likely amounts to little more than gusts of hot air – after all, their managers are surely capable of economic calculation. This strongly suggests that the speaking fees are a quid-pro-quo, either for services rendered in the past, or for services yet to be rendered in the future, by Ms. Clinton in her function as a bureaucrat-politician.

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A Fully Automated Stock Market——-Peaking At Internals And Blowoffs

July 23, 2016

Anecdotal Skepticism vs. Actual Data
About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.
 The bots keep buying…
Illustration via

All these strategies are more or less automated (they may be tweaked from time to time, but essentially they are simply quantitative and/or technical strategies relying on inter-market correlations, volatility measures, and/or momentum). Active fund managers by contrast are said to be skeptical of the market rally, but it should be stressed that the evidence for this is purely anecdotal.
The vast bulk of trading is nowadays automated. We recently read that in 2015, 23% of the entire year’s equity trading volume was accounted for by the top 100 ETFs (h/t to Brent Johnson of Santiago Capital). These are passive investments – in other words, they are brainless.
In addition to this, some 50% of volume is probably attributable to high frequency trading, and the above mentioned black box strategies presumably account for a good chunk of trading volume as well.

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The Monetary Central Planning Virus Mutates

July 20, 2016

Chopper Pilot Descends on Nippon
Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.

A bridge to nowhere near Kyoto (there is a second, similar bridge nearby, which for differentiation reasons has been dubbed “the bridge from nowhere”). We hasten to stress that such monuments to bureaucratic insanity are by no means unique to Japan – they can be found all over the world (just not in a similar density). The one question etatistes always ask and which supporters of a free society have no satisfactory answer for is: “If there were no government, who would build the bridges to nowhere?”
Photo credit: Jeffrey Friedl

Here is a brief summary of what just happened: first, contrary to the global trend of incumbents falling from grace nearly everywhere, Shinzo Abe and the LDP achieved a resounding election victory. This victory inter alia allows Abe to proceed with his militaristic agenda unhindered and to keep promoting his economic program that is best described as a mad-cap flight forward.

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European Banks and Europe’s Never-Ending Crisis

July 7, 2016

Landfall of a “Told You So” Moment…
Late last year and early this year, we wrote extensively about the problems we thought were coming down the pike for European banks. Very little attention was paid to the topic at the time, but we felt it was a typical example of a “gray swan” – a problem everybody knows about on some level, but naively thinks won’t erupt if only it is studiously ignored. This actually worked for a while, but as Clouseau would say: “Not anymeure!”

Italy’s prime minister Matteo Renzi, indicating how much capital is left in Italian banks…
Photo credit: Giacomo Morini / INFOPHOTO

Readers may want to check these previous missives out, which provide a lot of background information and color (in chronological order: “Insolvent Zombies”, “Drowning in Bad Loans” and “The Walking Dead: Something is Rotten in the Banking System”). What is happening now is therefore a “told you so” moment, because, well…  we told you so. ?
Following the “Brexit” vote, market participants have begun to focus their attention  on what we thought they would focus it on: namely on the risks posed by continental Europe.

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The Gold Situation—-An Update On The Uptrend

July 5, 2016

A Growing Bullish Chorus – With Somewhat Muted Enthusiasm
A few days ago a well-known mainstream investment house (which shall remain nameless) informed the world that it now expects the gold price to reach “$1,500 by early 2017”. Our first thought was: “Now they tell us!”. You won’t be surprised to learn that the same house not too long ago had its eyes firmly fixed in the opposite direction.

Da bling be goin’ somewhere, fellow rastas and homies!
Photo via

Why are we telling you this? We have noticed that sudden professions of new-found gold bullishness have begun to proliferate lately, relatively speaking at least. This is not only evident by these Canossa-like conversions of former bearish heretics, but also in the positioning data.
We hasten to add that the bullish arguments are by and large sound – we agree with most of them (for a complete list of same, see this year’s “In Gold We Trust” report). We also want to point out that (as we have mentioned a recent article on the  the CoT report  – see “The Commitments of Traders” for the details) a certain finesse is required to properly interpret allegedly “extreme” positioning data.
Lastly, it should be obvious that in order for a nascent bull market to continue, new converts are actually needed.

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Welfare State Socialism——Its Coming Demise

June 30, 2016

The Best Thing About the EU is J.C. Juncker’s Alcoholism
We recently discussed the post-Brexit landscape with a friend (in fact, our editor), who bemoaned that “the EU is led by a drunkard”. Our immediate reaction to this was to exclaim: “That’s the best thing about the EU!”

J.C. Juncker’s beady, greedy eyes are firmly fixed on the goodness emerging from the wine bottle…
Photo credit: François Lenoir / Reuters

Why do we think so? It makes this overpaid, useless bureaucrat human. Not only that, it clearly raises his entertainment value. As our regular readers know, we have insisted for many years that entertainment value is the by far most important criterion by which a politician’s worth should be judged.
The reason for this is simple: it is nigh impossible to achieve fundamental change by voting. Similar to everybody else, politicians and high-level bureaucrats act first and foremost in their self-interest. A young person deciding to enter politics may well be driven by antiquated notions of “public service”. Such ideas are quickly discarded once a political career actually begins.
A great many politicians are also psychopaths. Who knows what they would be up to if their jobs didn’t exist? Again, it is fairly simple to come to this conclusion – one doesn’t have to study psychology to arrive at it.

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Too Much Corporate Debt—–And Going Sour Fast

June 19, 2016

Taking Off Like a Rocket
There are actually two problems with corporate debt. One is that there is too much of it… the other is that a lot of it appears to be going sour.

Harvey had a good time in recent years…well, not so much between mid 2014 and early 2016, but happy days are here again!
Cartoon by Frank Modell

As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:

“Businesses racked up debt in the January-to-March period at the fastest pace in three quarters, according to data released Thursday.
Business debt grew at a blistering 7.9% annual rate in the first quarter, the Federal Reserve said. Business debt has expanded by around 8% in three of the last five quarters. Companies still have substantial cash on the sidelines, as their stockpiles edged down to $1.89 trillion from $1.9 trillion.”

(emphasis added)
While Marketwatch told us how much cash companies are holding, for some reason it didn’t deign to tell us how much corporate debt there actually is, in dollars and cents. It would be nice to be able to compare these figures, wouldn’t it?
Here is a chart that shows the sum of commercial loans held by US banks and outstanding US non-financial corporate bonds:

US non-financial corporate debt… can’t have too much of a good thing! – click to enlarge.

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How the Welfare State Dies

June 18, 2016

Hollande Threatens to Ban Protests
Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it’s basically crickets (sole exception: Politico).  Gee, we wonder why?

They don’t like him anymore: 120.000 protesters recently turned Paris into a war zone. All Hollande wanted to do was to loosen a handful of labor market restrictions (it’s too little too late of course). France’s labor legislation is among the most convoluted and restrictive in the entire nominally capitalist world. It has created enormous institutional unemployment and is a major contributor to France’s inexorable economic decline (see “France’s Sacred Labor Code” for details).
Photo credit: Benoît Tessier / Reuters

Given that France is under a “state of emergency” since last year’s terror attacks in Paris, it is presumably easy for Hollande to ban demonstrations by decree, from a legal perspective at least. It seems unlikely though that a ban would actually stop the protesters. What is Hollande going to do if they just continue to strike and hold demonstrations? Invade France? Arrest hundreds of thousands of people?
These protests have been going on for more than a month now.

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The VIX Breaks Out – Market Risk Continues to Surge

June 14, 2016

The Sharp Move in the VIX Accelerates
In Monday’s trading session, the upward move in the volatility index VIX (which measures the implied volatility of SPX options) continued unabated, vastly out of proportion with the move in the underlying stock index. “Brexit” fears continue to grow, which has apparently been the driving force behind this move.

The “Brexiteers” are gaining support as the referendum date draws closer – global financial markets are getting somewhat upset over this.
Photo credit: Neil Hall / Reuters

Monday’s move in the VIX has achieved a short term technical breakout:

The VIX breaks above the 17 level, which has contained upward spikes since late March – click to enlarge.

We have discussed the significance of the VIX in yesterday’s market update (see “Brexit Paranoia Creep Into the Markets” for details). We neglected to mention yesterday that this week is an options expiration week as well. If there are any big downside moves in the market in coming days, this fact is bound to exacerbate them, as writers of naked put options may be forced to delta-hedge their positions by selling the underlying stocks or indexes short.
As we have pointed out, the move in the VIX could by itself generate additional selling pressure, as a number of systematic investment strategies use it as an important input.

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Brexit Paranoia Creeps Into the Markets

June 13, 2016

European Stocks Look Really Bad…
Late last week stock markets around the world weakened and it seemed as though recent “Brexit” polls showing that the “leave” campaign has obtained a slight lead provided the trigger. The idea was supported by a notable surge in the British pound’s volatility.

Battening down the hatches…

On the other hand, if one looks at European stocks, one could just as well argue that their bearish trend is simply continuing – and likely would have continued regardless of the news backdrop. Ever since the Euro-Stoxx index fell below its 200-day moving average last August, the latter has served as resistance – and it is declining to boot:

Euro-Stoxx 50 Index – since falling below its 200 day moving average in August, it hasn’t managed to overcome it anymore – click to enlarge.

Compared to the strong rally in the US stock market since the February low, European stocks look extremely weak. Here is a comparison between the broader Euro-Stoxx 600 Index and the S&P 500:

Euro Stoxx 600 compared to SPX – this is quite a big divergence, something is ergo likely to give soon – click to enlarge.

Apart from the unreliability of the polls – there are still way too many undecided voters – we actually believe the world will keep turning in the event the “leave” campaign wins.

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Moving Closer to BREXIT

June 7, 2016

Polls Show Growing Support for a Break with the EU
In the UK as elsewhere, the political elites may have underestimated the strength of the trend change in social mood across Europe. The most recent “You-Gov” and ICM pools show a widening lead in favor of a UK exit from the EU as the day of the vote comes closer.

Pro-BREXIT campaigners Boris Johnson (ex-mayor of London) and Michael Gove (UK Secretary of Justice) are in a good mood.
Photo credit: Paul Grover / REX

To be sure, such polls can easily turn out to be wrong – especially as the percentage of undecided voters is still fairly large. Still, the current lead of the “leave” campaign is the greatest since 2013:

A long term chart of BREXIT poll results (note that the wording of the referendum question has been altered a few times)

In 2012 and 2013 the “leave” campaign’s lead was far larger as the euro area’s debt crisis was still fresh in everybody’s mind. It is a good bet that David Cameron chose the 2017 date for the actual referendum because he thought the effects of this particular problem would have dissipated by then.
They have indeed, but not completely. People were e.g. recently once again reminded of the costly extend-and-pretend exercise that is required to mask the insolvency of Greece.

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Arrant Star Trek Socialism

May 31, 2016

Robotic Utopia
In spite of the fact that Marx expressed nothing but disdain for his Utopian socialist predecessors such as Henri Saint-Simon and Auguste Comte, variants of Utopian socialism evidently live on. The latest iteration of the socialist dream is firmly focused on the capabilities of one of the countless fruits of free market capitalism, namely robots.

The new Utopian socialists believe that the latest capitalist gizmos will help them realize their dream of a society under the full control of socialist philosopher kings.
Image via

It is quite ironic that something that would never have come into existence in a socialist system is now supposed to hasten the introduction of same – and of course, this time, it will be done right!
The idea is basically this: as robots are becoming more sophisticated, more and more labor that is widely regarded as drudgery will become obsolete. Eventually, robots will take over the production of all the goods we need and want, and human workers will be free to pursue art, philosophy, or whatever else strikes their fancy.
So far so good, actually. It is after all the very aim of economic activity to increase labor productivity and produce ever more output with the same, or even a smaller input.

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Is the Economy a Machine……..No!

May 26, 2016

A Science Goes Astray
Human beings have a strong tendency to look for patterns. The natural sciences have shown that the universe is governed by laws, the effects of which are observable and measurable in an objective manner. Mostly, anyway — there is, after all, the interesting fact that observers are influencing measurements at the quantum level by the act of observation. (For our lives in the “macro” world, however, this is not relevant. An engineer does not need to take relativity or quantum physics into account to construct a machine that works.)

Is the Economy a Machine?

In the late 19th and early 20th centuries, a never before seen string of very rapid advances in scientific knowledge and technological progress occurred. It is hard to overstate the impact of inventions such as the automobile, radio, airplanes, and so forth. This happened while per capita economic growth in what is today known as the “developed world” reached its fastest pace in all of history — a pace never to be seen again.
Although we cannot prove it, we believe there was a good reason why this combination of vast economic and scientific progress took place at the time: governments were but a footnote in the lives of most people. By 1910, spending by the US government was a mere 4% of GDP.

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The Japanese Popsicle Affair

May 20, 2016

Policy-Induced Contrition in Japan
As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens.

Shinzo Abe and Haruhiko Kuroda, professional yen assassins
Photo credit: Toru Hanai / Reuters

Just think about the relentless pressure on the yen in the years following Kuroda’s implementation of the “QQE” policy (colloquially known as “money printing”). Economic growth has gone precisely nowhere, which should be no surprise. No new wealth can be created by printing money. If that were possible, Zimbabwe would be a Utopia of riches.
What has happened though is that in US dollar terms, Japan’s economic output is worth about 30% less today than it was in 2012 when the Bank of Japan (BoJ) began to administer its version of bloodletting. In practical terms, Japan’s citizens have to produce 30% more in order to pay for the same amount of goods imported from abroad than they had to produce in 2012.
The declared goal of this policy is to “raise inflation”, i.e. to lower the purchasing power of the money the BoJ issues.

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China’s Rolling Boom-Bust Cycle

May 16, 2016

Sweet Authoritative Nothings
There is a mysterious figure making regular appearances in China’s government mouthpiece “People’s Daily”, which simply goes by the name “authoritative person” (AP). This unnamed entity always tends to show up with bad news for assorted speculators, by suggesting that various scenarios associated with monetary and/ or fiscal stimulus are actually not in China’s immediate future (the details of AP’s latest pronouncements can be found here and here).

The People’s Daily. “Authoritative Person” may be hiding somewhere in the picture to the left.

Some observers seem to believe that this represents a “renewed shift in policy” – Bloomberg e.g. quotes an economist with Mizuho Securities as follows:

“It is very significant and may signal a shift in China’s policies,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Each time they publish this, it is normally a warning.”

Others are more careful – after all, this seems to be a case of “we’re saying one thing and doing another”, given a credit expansion of 4.6 trillion yuan in just the first quarter, which has sent narrow money supply growth soaring to more than 22% annualized.
The more measured argument is that it could be a sign that the debate about future economic policy is ongoing, resp. has been revived.

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Fresh Mainstream Nonsense on Gold Demand

May 14, 2016

They Will Never Get It…
We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen’s excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.

Gold wants to know what it has done now…
Photo credit: Ajay Verma / Reuters

This was brought home to us again in a recent missive posted at Kitco, which discusses an RBC research note on gold. In a way, it is actually quite funny. The post at Kitco is titled “Gold’s ‘One-legged’ Rally Is Cause of Concern”.
We can assure you it is not of “concern” to us. But we did wonder why the rally was supposedly “one-legged”, so we decided to read on.
Here is what RBC has decided was worth sharing in its new research report:

 Despite gold’s impressive run up so far this year, analysts at RBC Capital Markets are concerned by the “one-legged” nature of its rally. In a research report Friday, commodity strategists for the bank noted that gold’s 2016 upswing has been mainly driven by investors, while other sources of demand haven’t followed through.
“In fact, investment demand seems to be the only leg driving this one-legged rally. For us to turn positive, we would need to see this strength replicated elsewhere,” they said.

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Kuroda-San in the Mouth of Madness

May 13, 2016

Deluded Central Planners
Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.

BoJ governor Haruhiko Kuroda
Photo credit: Toru Hanai / Reuters

The mental state of BoJ governor Haruhiko Kuroda may be even more precarious though. As Marketwatch reports, he recently gave an interview to German financial newspaper Börsen-Zeitung, in which he inter alia threatened even more BoJ intervention:

Bank of Japan Gov. Haruhiko Kuroda said the central bank “can still ease [its] monetary policy substantially” if necessary, in an interview with German financial newspaper Börsen-Zeitung published Wednesday.

This is per se not surprising, although one wonders what Kuroda thinks can possibly be achieved by upping the ante on this:

Assets held by the BoJ vs. the Nikkei index – April 1999 = 100 – click to enlarge.

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Reality is a Formidable Enemy

May 9, 2016

Political Correctness Comedy
We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio’s recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.

How to most effectively create a “safe space” on campus
Cartoon by Nate Beeler

It is especially funny (or terrifying, depending on one’s perspective – we prefer funny) to what extent political correctness has invaded colleges. Frankly, we actually had no idea just how far this malady has advanced by now.
A recent article in the conservative journal National Review listed the “13 most ridiculously PC moments on college campuses in 2015” – readers can check the details out over there, but below are a few examples from the list. They read like a dispatch from the stand-up comedy universe:

Hating pumpkin-spice lattes was declared sexist.
A university language guide stated that the word “American” was “problematic.”
A university study declared that we have to accept people who “identify as real vampires.”
The word “skinny” was deemed “violent.”
A university declared the phrase “politically correct” to be politically incorrect.

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