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Infoxication

January 2, 2015

Brainisfull

In case you haven’t noticed, I have not been blogging much lately. Why? Mostly because I’m tired of listening to so many pontificators, with present company included. Everyone seems to know everything these days and we all feel free to express our meaningless opinions (mostly anonymously), because those opinions — or “facts”— no longer need to be supported by sound evidence or reason. We are now a society that can find an internet site that reinforces our existing biases and prejudices so that we may maintain and justify them. Understand, I am not pointing my finger at anyone else here; I’m looking in the mirror.

Do you ever wonder just how overloaded we are with information in this information age? I used to think the more I read the more I would know. Now I think the more I read the less time I have to think. This is not a new idea. In fact, I would argue it is in the same vein as: Information overload (also known as infobesity or infoxication), which refers to the difficulty a person can have understanding an issue and making decisions caused by the presence of too much information. (I have to be honest here — I had never heard the term “infoxication” prior to looking up the definition of information overload on Wikipedia. I feel a little better since infoxication keeps getting the red underline by spell check.)

I mention all of this only to suggest we need breaks from our favorite internet sites. I gave up watching television “news” long ago and lately I have given up much more of my computer time — as those who know me can confirm by my lack of response to emails. I have found it hard to give up two of my favorite websites, however. Weather.com and ZeroHedge.com nearly always get a daily glance. But I have made an observation: this is something I can do when I’m not too busy jumping from website to website; the accuracy of my weather site is directly related to how predictable the weather is. For example, I am a hell of a good weather forecaster in July (sunny and in the 90s). I obviously look at the weather sites when the weather is much less predictable, or more volatile, because I can’t predict whether my outdoor plans may be spoiled by a storm (and yes I’m learning that the weather forecasters can’t either).

We do this same thing with other news, particularly with financial news. Don’t we spend a lot more time reading financial news when the markets are in turmoil (showing volatility)? But I fear, much like weather, this is when your prognosticators (economist/financial media) are going to be wrong the most often. Even though our financial markets are setting new record highs, our economy has never been more volatile. We can no longer focus on one subject for more than a nano-second. We jump from one news headline to the next, never contemplating what the last bit of information we digested actually means in the big picture or for the long term. More information does not mean we are better informed, but it is teaching us not to think, or to reflect, or to contemplate, or to analyze…

With that said…

Zero Hedge recently made the following statement:

So with all of this pessimism behind us, does that leave us more optimistic heading into 2015?

We don’t know: as frequent readers know, we do not pretend to be able to predict the future. We do know, however, that with $11 trillion in liquidity injected just by the world’s developed central banks, and the tens of trillions of credit money created… the entire world is floating on an ocean of excess money, which for one more year has succeeded in masking just how ugly the truth beneath the calm surface is. Sooner or later, the tide always comes out, and those swimming naked are always exposed. However, this time it will be the very final backstoppers of the status quo regime, the central banking emperors of the New Normal, who are finally revealed as wearing absolutely nothing. What happens then, and when that happens, is anyone’s guess.

This same concern is the reason I began blogging. I have written many times about the Central Bank’s unprecedented monetary experiment, including a very similar blog post written in October 2012 titled, “Money Aplenty.” The real question that still has not been answered is whether this “economic recovery” can stand on its own two legs. In the past, allowing the economy to stand on its own, without the Fed’s massive manipulations, repeatedly caused the markets to begin to melt down, which caused the Fed to stop mentioning that the punch bowl might be taken away in the near future. Instead, now when the party-goers begin to complain, the Fed begins to up the verbal ante by suggesting maybe more stimulus is in the works. The markets respond with a cheer and continue the march toward new record highs. In reality, these are moments we need to stop reading and begin reflecting. How many times have the Feds told us that we are in a recovery, yet they continue stimulating? It is now 2015; we are now nearly eight years into this grand experiment and the economy can’t stand on its own two legs. Last October we had a rare moment of contemplation where a few ‘mainstreamers’ dared to ask the question: “What if the world central banks’ policies don’t actually work?” That question alone sent the markets into a tailspin. However, instead of dealing with that question honestly, we elected to put our head back in the sand.

This is not a matter of deep contemplative reasoning or thinking. The answer is clearly in front of us. While the Fed has ‘tapered’ its ongoing monthly purchases of treasuries, absolutely nothing else has been done to normalize monetary policies. The Fed still fosters the zero interest rate policy, they still have a massively unprecedented balance sheet, they still own toxic assets, the government is still growing its unprecedented debt, they still haven’t reined in dangerous derivatives, and on and on the list goes. But why is this? It is my humble opinion it is because they know the economy cannot stand on its own two feet! Eight years of this experiment and counting and what do we have to show for it? Other than far-reaching asset bubbles, we have seen a significant reduction in unemployment; but I would argue that with $11 trillion of liquidity and even more in debt, every able body person should have a job. I agree with Zero Hedge that one day the central bankers will be revealed to be wearing no clothes and then something will happen, but I’m not sure what.

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What can you believe?

December 23, 2014

The more I try to just watch and learn from this market, the more I am convinced there is nothing you can trust. Case in point, take this current decimation of oil prices. I have read numerous pontifications about why this significant price drop is occurring. They include lack of demand, shale oil, OPEC… In all of these justifications, there is nothing that seems to be a new issue that is precipitous to such a rapid descent in oil prices. And then, somehow, it was this drop in oil prices that caused the equity market turmoil. What happened to lower gas prices freeing the consumer up to spend their money in other places? And what about the significantly reduced cost of goods to market? Wouldn’t this help producers and retailers with their bottom line and in turn help the markets? It seems there is no logical or intuitive answer to any of this.

Fed Whisperers

The last time the market seemed headed for correction (October), it was a Federal Reserve board member that whispered the possible need for more quantitative easing. This time Fed Chairwoman Janet Yellen noted the need to extend the zero interest rate policy. On both occasions they were effective in juicing the market. In fact, as of today, the Dow broke 18,000 points, a new record.This is now our market fundamentals — “the fed whisperers.”

Gotta love this quote

November 5, 2014

Zimbabwe’s stock market was the best performer this decade — but your entire portfolio now buys you three eggs.  —Kyle Bass, February 2013.

When I see a few (very few for that matter) financial pundits begin to question central banking policies in the mainstream financial news, I immediately think the day of reckoning has arrived. As Kyle Bass pointed out in the interview nearly two years ago (posted Monday), it all takes time. Although once it collapses it will likely happen very quickly, the process of changing the faith of the masses requires enormous energy and undeniable proof. Our world’s faith in central banking seems to be our only play — and hope — these days to save the world economy. Everything rides on the faith that our central bankers really do know what they are doing.

History has given us prime examples of what happens when a nation of people lose confidence in their currencies as a result of their government policies. The Weimar Republic and, more recently, Zimbabwe and Argentina, are a few such examples. I am not suggesting these examples are our destiny and would sincerely hope they are not, but currencies will undoubtedly be affected when confidence in central banking is lost. The difference this time is that it is not just one nation implementing this unprecedented experiment with monetary policy, it is every central bank in the world. So this is significantly different than anything we have done to ourselves in history. Zimbabwe and Argentina have just out-monetized the rest of us. But neither are leading economies like Japan. The size of Japan’s economy and the size of their “accommodative” monetary policy make them the nation to watch. Do you realize that the Weimar stock market reached over 26,000,000 in 1922, when just four years earlier it was at 126? What a return — except that it puts the above quote in perspective.

Don’t get me wrong, the best scenario is that the faith most have put into our central bankers proves to be correct, and that they are capable of fine-tuning all the dials to ease us back into a normal economy. By the way, is there anyone out there who remembers what normal actually looks like?

Better than I could say it:

November 3, 2014

My writing concentrates on the problems I see with the fiscal and monetary policy decisions being made these days. It is understandable that readers want to know what it will mean to them directly. I really hate to tell readers exactly what it will mean or what they need to do to protect themselves. So the solution is to find someone who can say it better than me. Kyle Bass is a professional investor who correctly predicted the real estate bust and made a lot of money being on the right side of that economic event.

I have listened to Bass over the years and I recalled he was very bearish on Japan, so I went back and looked at an old interview (2013). I have noted many times that if anyone is concerned about central banks’ monetary policies around the world, pay close attention to what goes on in Japan because of all the grand monetary experiments we are in, Japan’s is the grandest! Overnight the Nikkei was up 755 points on news that the Bank of Japan would be doing another massive bond purchasing program (Quantitative Easing or QE). The Japan state pension system announced at the same time that they would dramatically shift more of their funds into equities. The yen has been collapsing, but obviously their stock market is celebrating and driving other European markets higher. If I lived in Japan I would want to be invested in anything but their native currency.

Anyway, the following interview is actually pretty good and in my opinion is exactly what we can expect will eventually happen around the world, including in the U.S. Sorry, but it is about 10 minutes long. The central banks and financial media are echoing concerns about fighting deflation, but if you really want to know how their policies will affect all of us, plan on the collapse of currencies — hence inflation. But that is only a guess. The better litmus test is to watch what happens in Japan. When their currency collapses even further than it has, watch the pundits justify why we won’t see the same here. As Bass points out in the following interview, it will all take time to work itself out, but there is no way out for Japan. They have dug too deep of a hole!

Here’s the bottom line: Is it possible that we experience deflation? Yes, it is possible, although I think central banks will always err on the side of way too much easing — and they already have. There is a chance that the central banks admit their policies do not work, albeit not quite so candid as that. And then our economies will have to deal with deflationary pressures, all the while having the added weight of excess liquidity. My final bet is that Bass is right. I hope that clears things up!

Better_than_I_could_say_it

Don’t believe your lying eyes!

October 31, 2014

Here is today’s headline:

Stocks charge toward new highs after Bank of Japan’s ‘QE’

For just the 16th time in 114 years the Dow is set to reverse from 6 percent down to back in the black in one month.

It seems remarkable that we actually started to have a moment of clarity and perspective a couple of weeks ago when a few economists began to ask the question, “What if the Fed does not know what they are doing by adding so much liquidity into the markets?” The markets began to tumble in response to those questions; so what did the Fed do? They hinted that maybe they needed to do QE4.

And now with the master of all monetary easing — the Bank of Japan announcing more QE — the market is all smiles and ready again to set new highs. Remarkable! We had a moment of clarity by asking the right questions and doubting the central bank policies around the world and then we turn around and accept that more of what they were doing wrong is the solution!?!?

It’s called supply side monetary policy — or liquidity! More of it will ultimately prove to only dig a bigger whole. I guess Wall Street has figured out that it is safer to try to keep digging down rather than attempting to climb out. They hope the reports of molten lava at the center of the earth are greatly exaggerated.

What to do?

October 20, 2014

Today’s blog entry is also a response to a question posed to me by a reader, Robert, regarding what our options are when it comes to our personal investments.

I fear you are correct. However, I continue to invest in the market via stocks, bonds and mutual funds. I also own real estate and a variable annuity.

I worked in a system that provided me a pension and a small Social Security check. My spouse worked in a system that provided her a small pension and a Social Security benefit.

We have Medicare. We have CAHP Anthem Blue Cross as a supplement to that.

We have long term care insurance. We live frugally and within our means. We give to charity and financially assist family members.

My point being, what else can or should we do? These systems are all we have. We play by the rules set by others and hope for the best outcome.

Other than doing that, what should we do to protect ourselves? Write about that please. We respect your thoughts.

Actually, Robert’s question highlights the very reason I have cut back on my writing. I hate to be the one that yells fire in a crowded movie theater, only to announce a few seconds later that all the exits are completely blocked. When I surmise that investing in today’s financial markets is like gambling in a rigged casino, I understand that the natural response is: What option do we have? However, unlike the rigged casino, we really don’t have the option of not playing. Actually, Robert is doing everything right and that is exactly why I get so disturbed with all the manipulation occurring in our markets. In fact, this is why I write and why I hate to write on this blog — the markets are rigged, yet, truly, what are our options?

Free markets are supposed to reward good business practices and innovation and punish poor practices and redundancy. What has happened in the financial markets is beyond egregious and in my opinion has eliminated any resemblance of free markets. Interest rate expert Jim Grant has made this very claim, that nothing could be more intrinsic to free markets than interest rates that are free to set themselves based on a free market. Yet interest rates are being artificially held low (zero) by the Federal Reserve in their effort to stimulate the economy. But this action punishes savers. Any monetary or economic action that is not the result of free markets is an unnatural selection of winners and losers. Very simply, the Fed is punishing those who should have been the winners and rewarding those who should have been the losers. They are fixing the game, if you will, and not in favor of the responsible investor, or citizens for that matter.

I hope the Fed proves me wrong, that their intervention proves that everyone can be a winner, but I fear that in the long term they will be proven wrong. The biggest losers will be the next generation, who will be left holding the bag after this grand economic experiment. In the meantime, we are left to ponder “What other options do we have?” We don’t make up the rules, we can only play by them — even when the rules change mid-stream. Former Reagan economic advisor, David Stockman, best describes this current financial manipulation as “crony capitalism.”

So how should Robert invest in such a market? Really, his question is more along the lines of how to live in such an economy. What Robert is doing is absolutely right, especially living frugally and within his means. He has taken steps to protect himself and his family; he has been responsible and he has played by the rules. I write this blog for this very reason. I am beyond frustrated by the economic and monetary policy I see happening in this country for well over a decade, closer to two decades. There seems to be this blind faith that the Fed knows what it is doing and is in full control. This is the crux of my disagreement with individuals who frankly are much more qualified than I to assess the Fed’s intervention. It seems that as a result of this latest correction in the markets, for the first time a couple of mainstream financial news outlets have allowed someone to question whether the Fed actually does know what they are doing. Ironically, the major come-back by the equity markets on Friday was caused by a Fed official suggesting that maybe the quantitative easing (QE) needed to continue. That’s just what the markets wanted to hear. I tell you it must be easier for a heroin addict to stop their habit than our current financial markets kicking their QE addiction!

I have to invest other people’s money. I worry about how to invest in financial markets that, in my opinion, are rigged. As an organization we have been careful to live within our means, create a rainy day reserve and play by the rules. We have never taken undue risk, leverage or relied on debt to pay our bills. What I would like to see happen is for large institutional investors (trust funds, pension funds, endowments, insurance companies, etc.) to stand up and challenge central bank policies, legally if necessary, on behalf of all the Roberts out there.

Was their massive balance sheet expansion a flop?

October 17, 2014

Central banks around the globe have undergone the greatest monetary experiment of all time. What we must be asking — and finally a few are asking — is what if our central bankers actually didn’t know what they were doing? While the Fed balance sheet, shown below, reflects just how grand this experiment has been (more than a fivefold increase), we should remember that this is actually only a small part of our central bankers’ market distortions.

Remember ZIRP, “too big to fail” and essentially replacing free markets by dictating where the flow of funds should go through their discriminating policies? Yes, the Fed has created some economic activity, but mostly they have generated financial activity — Wall Street activity. Certainly NOT Main Street activity. They have encouraged more debt, more risk-taking and more leverage, and have rewarded poor financial practices with their policies while taking credit for saving the economy.

Will this be the day of reckoning for central banks’ ill-conceived policies? I haven’t a clue. But, I do believe there will be such a day. And how that plays out might be the most significant economic event in history.

Balance Sheet