Dylan Grice: Central Banks are Causing a Breakdown in Society

“In one of Dylan Grice‘s final notes as an investment strategist at Société Générale, he wrote that he was “more worried than ever” by the “social debasement” that central banks were causing in society.

Grice announced in November that he was leaving SocGen for the buy side.

Today, he is out with his first note since joining Edelweiss Holdings, his new firm, and it touches on much of the same that was discussed in the SocGen note referenced above.

In the note – titled “Would the real Peter and Paul please stand up?” – Grice explains his theory of how monetary policy experimentation is leading to a breakdown of societal trust. The idea is that everyone sees their paper currency buying less and less physical goods, but the cause of this inflation is not widely understood, which means everyone just looks to cast the blame on each other.

Referring to the general populace, Grice writes:

The problem is that while they will be acutely aware of the reduction in their own spending power, they will be less aware of why their spending power has declined. So if they find groceries becoming more expensive they blame the retailers for raising prices; if they find petrol unaffordable, they blame the oil companies; if they find rents too expensive they blame landlords, and so on.

So now we see the mechanism by which debasing money debases trust. The unaware victims of this accidental redistribution don’t know who the enemy is, so they create an enemy.

“Deliberately impoverishing one group in society is a bad thing to do,” says Grice, referring to central banks, “But impoverishing a group in such an opaque, clandestine and underhanded way is worse.”

From there, Grice links several examples of phenomena currently unfolding around the world to this idea that central banks are debasing social trust with their “crackpot monetary ideas.”

Below is the key passage:

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“Bank stocks have undoubtedly been one of the leaders in the latest stock market rally.

The chart below, normalized to 100 at November 15 prices (the starting point), shows how bank stocks have outperformed. The red line is the KBW Banks Index (ticker symbol: BKX) and the blue line is the S&P 500.

 

 

After a bit of a pullback, the KBW Banks Index surged to new highs in the last few weeks of 2013.

On the back of this rally, BofA analysts Erika Penala and Mary Ann Bartels say now might be the time for those invested in the banks to sell….”
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“BofA Merrill Lynch strategist David Woo is out with a report this week on the changing nature of the U.S. dollar’s relationship with oil prices and what it means for the future of the American economy.

The main conclusions of the piece are that a stronger dollar will help remove volatility from the business cycle in the U.S., make more people want to invest in U.S. assets, and further enhance U.S. economy’s competitiveness vis-a-vis China and Europe.

All of this is thanks to the American energy boom.

Woo says that the biggest surprise of 2013 so far has been the noticeable decoupling of a longstanding negative correlation between the U.S. dollar and world stock prices – “one of the most enduring features of financial markets over the past decade” – as illustrated in the chart below.

 

 

According to the report, a big component of this inverse correlation between the U.S. dollar and global growth over the last decade has been the rise in Chinese energy consumption….”

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“NEW YORK (Reuters) – TD Ameritrade Holding Corp , the biggest broker for active individual traders, said that client assets in February crossed the $500 billion threshold as the firm seeks to offset flaccid commission income with asset-based fees.

The announcement on Monday accompanied the Omaha-based discount broker’s report that client trades in February were essentially flat with January and down 6 percent from February of 2012. The firm’s chief financial officer last week signaled that client trades would track the broader market, where stock trading inched up 2 percent while stock options trading fell by the same amount.

TD Ameritrade’s flaunting of its half-trillion dollar asset milestone mirrors rival Charles Schwab Corp’s announcement last month that its client assets at the firm passed the $2 trillion level. Schwab has not yet announced its clients’ trading metrics for February, but they generally make fewer average daily trades than TD Ameritrade’s clients….”

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“Norway’s $713 billion sovereign wealth fund is turning away from the world’s biggest currencies and their debt-laden governments as policy makers undermine their exchange rates through unprecedented stimulus measures.

The Government Pension Fund Global, the world’s largest wealth fund, cut its holdings in French and U.K. government bonds by almost half last year as it raised its share of government bonds in emerging-market currencies to 10 percent of its fixed-income holdings by adding investments in Turkey, Russia and Taiwan.

“It’s what we perceive as a risk-reducing investment strategy,” Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, said in a March 8 interview in Oslo. Cutting dollar, yen, euro and pound investments is a “prudent” move, he said. “These four major currencies all have structural issues, with regards to government debt, to private sector debt, to unconventional monetary policy, and to growth and the demographic profile of the countries.”

At issue is how central bankers across the globe will eventually unwind the uncharted stimulus measures enacted to prop up global growth since the onset of the financial crisis in 2008. Debt levels have soared for governments across much of the developed world. In Europe, political leaders are trying to save the region from a fiscal crisis now in its fourth year.

Monetary Easing….”

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“Economic data is improving in the U.S., deteriorating in Europe, and a bit mixed in China.

Meanwhile, the stock markets are staging a huge rally.

Last week, Goldman Sachs economist Jim O’Neill gave a presentation at the prestigious Ambrosetti Financial Markets Workshop.  He updated its attendees on how he sees the world, and he outlined some of the issues that concerned him.

One issue was the evolving make-up of the German exports (slide 37).

“I repeated a remark I often make that on current trends, by 2020 Germany would rather be in a monetary union with China than with France,” said O’Neill

Indeed, China was another hot topic in his presentation.

“Probably the most important slide of the presentation is page 8 which shows global and regional GDP since 1980, and what we are assuming for this decade,” he said. “As I pointed out in Cernobbio, China growing at 7.5% is essentially equivalent to the US growing at 3.75%, given China is now $8.2 trillion in size.”

O’Neill believes China is an “underhyped” story.

His entire presentation gives an excellent and comprehensive view of the world.  And it’s worth reviewing closely.

NOTE: Thanks to Goldman Sachs Asset Management for giving us permission to feature this presentation.

Full presentation

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U.S. equities have shrugged off negativity from overseas. After being down not so much we are now trading up by 28 points on the DOW and nearly 2 points on the S&P. Overall, a digestion day after a monster week of performance and new highs.

Europe made a comeback as we did not tank.

Market update

European boards

[youtube://http://www.youtube.com/watch?v=oBIxScJ5rlY 450 300]

 

 

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“The current de facto policy of inflating asset bubbles to spark a “wealth effect” is no substitute for policies that make it less burdensome to start new enterprises and hire employees.

The Status Quo is shameless when it comes to hyping the recovery by whatever metric is most positive. Recently, that has been the stock market, but if GDP rises significantly (and recall GDP increases if the government borrows and blows money), then that number is duly trotted out by politicos and Mainstream Media toadies.

If we scrape away this ceaseless perception management, we find that legitimate broadbased prosperity is always based on rising employment and increased purchasing power of wages. The phantom wealth that is conjured by asset bubbles vanishes when the bubbles inevitably pop, leaving all those who borrowed against their ephemeral bubble wealth hapless debt-serfs.

Since very few households own enough productive assets (i.e. financial assets above and beyond the family home equity) to replace earned income (i.e. a job) with unearned income, rising asset yields and prices do little to improve household wealth or income.

Those with investable assets of more than $1 million are labeled “high-net-worth individuals” or HNWIs. There are about 3 million Americans who qualify as HNWIs; roughly 1.8 million Americans own $2 million or more in investable assets. Number of Rich Americans Fell in 2011.

For context, the U.S. has about 307 million residents and about 110 million households. Roughly 112 million people have full-time jobs and about 38 million are self-employed or have part-time jobs.

Recall that thanks to the Federal Reserve’s zero-interest rate policy (ZIRP), $1 million invested in short-term Treasury bonds earns around $10,000 a year in interest–less than a job paying minimum wage. Owning $1 million in stocks that pay a 2.5% dividend yields $25,000 a year in income, considerably less than the median wage of around $35,000. So even $1 million isn’t necessarily generating enough income to replace earned income (wages).

If prosperity ultimately depends on employment and earned income (wages), how are we doing as a nation? Unfortunately, the answer is “terrible.” As a percentage of the population, full-time employment is down. Only 36% of the population has a full-time job.(Charts 1 & 3 were reprinted by permission from mdbriefing.com; charts 2,4 & 5 are courtesy of frequent contributor B.C.):

It is also down on a per capita (per person) basis:

Meanwhile, an increasing percentage of jobs are part-time. When the media reports that the number of those employed has gone up, note they never break down how many of those new jobs were full-time and part-time.

Total civilian employment is also down:

If we adjust GDP for the growth of M2 money supply and population, we find the broadest measure of the U.S. economy is tanking.

As for wages, I have often reprinted this chart by Doug Short: adjusted for official inflation, real wages are down by 7% – 8%.

(Doug recently reported on net worth, which has nominally matched previous levels but adjusted for official inflation is down 12% from its peak: Household Net Worth: The “Real” Story.)

Adjusted for inflation, the median income for the lower 90% of wage earners (138 million people) has been flat since 1970–forty years. Only the top 10% (14 million people) actually gained income, and only the top 5% gained significantly (+90%).

Clearly, current policies are not very employment-positive. We could start by noting that the only way 90% of the populace can buy more goods and services is if the cost of living declines, i.e. deflation…..”

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“Did you think last summer was dry? It’s going to get worse.

On the heels of the worst U.S. drought since the 1950s, long-range weather forecasts are showing that not only will the drought continue, it will intensify.

Consequences could be disastrous for farming and ranching communities across the Midwest — and lead to another spike in commodities prices should yields again suffer.Read “How droughts will reshape the United States” on The Washington Post.

The U.S. economy is still only starting to process last year’s drought. On the consumer side, recent government reports confirm that food prices have just begun to rise due to last year’s drought that — at its peak last September — covered nearly two-thirds of the country. Though hot weather and lack of rain caused futures prices for corn and soy to peak at new record highs last August, a lag in the country’s agroprocessing system means consumers — and therefore the broader economy — won’t feel the full brunt of higher supermarket prices for meat, dairy, and grains until later this year. Read USDA report on the 2012 drought.….”

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“American drivers finally saw some relief at the pump as U.S. gasoline prices fell 5.56 cents per gallon over the last two weeks, a widely followed industry analyst said on Sunday.

The Lundberg survey said the national average price of self-serve, regular gasoline was $3.7394 per gallon on March 8, down from $3.7950 on Feb. 22.

The first drop of the year reflects easing crude oil prices, said survey editor Trilby Lundberg, but it is mostly due to refiners cutting wholesale prices for retailers following weeks of increases.

“It was practically in the cards that retailers would be able to pass through price cuts to motorists,” Lundberg said in an interview.

In the nine weeks through Feb. 22, retail gasoline prices rose more than 53 cents, or 16.5 percent, as refiners idled capacity for maintenance work ahead of the spring and summer driving seasons.

Lundberg predicted gasoline prices would fall another 10 to 12 cents or more in coming weeks, since refiners and retailers both have profit margins healthy enough to support price cuts…..”

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“Federal Reserve stimulus and government borrowing to meet its obligations are driving stocks to record highs on a daily basis, according to RC Peck, chief investment strategist and CEO of Fearless Wealth.

“It really feels like this is what $8 trillion gets you, between deficit spending and money printing,” Peck told Newsmax TV in an exclusive interview. “It’s been about $8 trillion over the last four years and I really don’t think we’d be at these prices [if it weren’t for that].”

Peck added that the total doesn’t take into account the liabilities that the U.S. has assumed during the period…..”

Full article and video interview

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Fun times for employment in the great recovery…..

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“Samsung Electronics topped China’s smartphone market for the first time in 2012, according to data from Strategy Analytics (reported by Yonhap News Agency). The Korean tech behemoth nearly tripled its sales in the world’s largest market for smartphones: in 2012, it sold 30.06 million smartphones in China, up from 10.9 million handsets a year earlier. According to Strategy Analytics, Samsung now holds a 17.7 percent market share–an astonishingly rapid climb considering that the company only started selling mobile devices in China in 2009.

Chinese company Lenovo took the second spot with market share of 13.2 percent, up four percent from 2011, while Apple came in third with an 11 percent market share, followed by China’s own Huawei Technologies with 9.9 percent and Coolpad with 9.7 percent. Samsung’s fast ascent mirrors Nokia’s quick plummet–the Finnish company is now number seven in China, with 3.7 market share, compared to 29.9 percent in 2011…..”

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“Get ready for some more M&A activity in the real estate sector. This morning, the real estate search engine Trulia announced that it is looking to raise up to $100.3 million $150 million in a follow-on offering, with “some or all of such net proceeds to acquire or invest in complementary businesses, products, services, technologies, or other assets.” Trulia went public last year, and currently has 23.6 million monthly active users. Update: today’s follow-on filing is an amendment that includes the partial release of some shares owned by “certain officers and directors of the company” that were previously locked up. A spokesperson says that it is for $150 million, with $100 million going to company reserves.

In a filing with the SEC, the company said it would be offering some 5.25 million shares in a primary and secondary offering. 1.75 million of those shares will come from selling stockholers, and 3.5 million will come from Trulia itself, with the $100.3 million calculation based on its $30.44 per share price as of March 8 on the NYSE. It also notes that the raise could be as high as $115.4 million “if the underwriters’ option to purchase additional shares in this offering is exercised in full.” …”

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“Someone is obviously not complying with the central-planner script and rotating fast enough into equities.

In February, total NYSE matched volume (defined as the number of shares of equity securities and exchange-traded products executed on the NYSE Group’s exchanges), dropped 13.6% from a year ago, 9.4% from January, and at 20.5 billion shares in the 19 trading days of February, represents a fresh decade low for the exchange (source).

Perhaps it is time for central planning to take it up a level and restore some more confidence in equities as an asset class….”

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“Italy could see its borrowing costs rise above those of troubled Spain this week, analysts told CNBC on Monday, with a credit rating downgrade on Friday and continued political deadlock posing an ever larger threat.

“Italy is really going to blow it up this week,” Joe Rundle, head of trading at ETX Capitol, told CNBC. “There is the downgrade that happened on Friday but now there is the Italian yield and the spread narrowing tothe Spanish yield and there is the possibility that Italy gets more expensive than Spain. The last time we saw that we were in the middle of a euro zone crisis,” Rundle told CNBC Europe’s “Squawk Box”.

Rundle added that while political uncertainty lived on in Italy, there was the potential for Italy to “come unwinding very quickly.”

On Sunday, Beppe Grillo’s anti-establishment 5-Star Movement reiterated that it wanted to lead Italy’s next government rather than form an alliance with any other party.

Grillo’s comments followed a credit rating downgrade of Italy by Fitch on Friday. The country was downgraded to BBB plus with a negative outlook. The downgrade was attributed to inconclusive election results in February that have led to a power vacuum and delays to structural reform as no one party gained a majority to form a government…..”

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“One in four Germans would be ready to vote in September’s federal election for a party that wants to quit the euro, according to an opinion poll published on Monday that highlights German unease over the costs of the euro zone crisis.

Germany’s mainstream parties remain solidly pro-euro despite grumbling over bailouts of countries such as Greece. A German taboo on nationalism, rooted in atonement for the crimes of the Nazi era, has helped to muffle eurosceptic voices.

But the poll conducted by TNS-Emnid for the weekly Focus magazine showed 26 percent of Germans would consider backing a party that wanted to take Germany out of the euro and as many as four in 10 Germans in the 40-49 age bracket would do so.

“This suggests there may be potential here for a new protest party,” Emnid chief Klaus Peter Schoeppner told Focus.

The survey canvassed the views of a representative sample of 1,007 people on March 6-7.

A new eurosceptic movement called ‘Alternative for Germany’ (AfD) comprising mostly academics and business people is due to hold its first meeting later on Monday in a northern suburb of Frankfurt….”

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“Intrade, an online service that lets people bet with one another on events such as elections and the weather, ceased trading activity, saying it is investigating possible financial irregularities.

The firm, owned by Dublin-based Trade Exchange Network Ltd., will not make payments to customers from their online accounts while the investigation is in progress, it said in a statement on its website. The service provider has closed and settled all open contracts at fair market value as at the end of March 10, it said.

“During the upcoming weeks, we will investigate these circumstances further and determine the necessary course of action,” Intrade said in the statement. The company’s auditors last month expressed concern over payments to the accounts of the firm’s late founder, John Delaney.

Intrade allowed customers to bet with one another on binary outcomes of future events such as the possibility of Cardinal Peter Turkson of Ghana becoming the next Pope. Just as stock exchanges find the price of shares, the so-called prediction market found the probability of an event happening, according to Intrade’s website. The marketplace accurately predicted the results of the U.S. presidential elections in 2008 and 2012 and was used by central banks and Wall Street firms, it said.

The company’s statement didn’t give details of any irregularities and said it took the actions in accordance with Irish law. Carl Wolfenden, Intrades’s operations manager, declined to comment when contacted by telephone today. A spokesman didn’t immediately respond to a request for comment…..”

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“When Ben S. Bernanke asserted last month that the Federal Reserve doesn’t ever have to sell assets, he raised questions about how the central bank can withdraw its record monetary stimulus without stoking inflation.

The Fed may decide to hold the bonds on its balance sheet to maturity as part of a review of the exit strategy Bernanke expects will be done “sometime soon,” he told lawmakers in Washington on Feb. 27. This would help address concerns that dumping assets on the market will lead to a rapid rise in borrowing costs. It also allows the Fed to avoid realizing losses on its bond holdings as interest rates climb.

Removing asset sales from the exit plan Fed officials agreed to in June 2011 means the central bank would stop prices from accelerating by relying primarily on its ability to pay interest on the cash it holds for banks. Given that the Fed’s total assets have reached an unprecedented level of more than $3 trillion, leaving them untouched when the economy picks up may stoke inflation, according to Dean Maki, chief U.S. economist at Barclays Plc in New York.

“If the Fed doesn’t withdraw quickly enough, there’s a risk of overshooting,” Maki said. “If the Fed gets rates back to a typical level and the economy is back to what’s regarded as normal, does having an expanded balance sheet have a notable effect on the economy, on asset markets, even once rates are normalized? We haven’t really had that situation in the U.S. before.”

‘Precisely Analogous’

No country has ever had a comparable increase in the size of its portfolio and unwound it “in the precisely analogous way,” Bernanke said in response to questions from members of the House Financial Services Committee. Japan was the only nation to use asset purchases, or quantitative easing, before the U.S. and is “still in that situation,” he said…..”

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