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FX Trading – The Keynesian Path-to-Failure Game

I keep saying to JR and David: you really couldn’t make this stuff up if you tried. These guys at the top are supposed to be the “best and brightest” minds we have to offer; if that’s true we should all be building shelters while we can still afford bricks.

But then again, maybe gold buying is merely the virtual bomb shelter it’s advertized as on TV. The gold guys seem to understand deep in their gut, despite all the economic theories of cash flow, yield, inflation, deflation, or relative performance, US policymakers are heading down the path to a failure that will have worse consequences than it did during the credit crunch. The “best and brightest” are running out of our money to use to save us with. So, create more in order to produce leverage in the place of real wealth creation. [See, told you it would be hard to make this stuff up.]

What a game! Let’s call it the “Keynesian path to failure” game. A game you can only find being played by academics, primarily at the most so-called “elite” educational institutions. [Benoit, phone home!]

We’ve said many times for the last two years—this ain’t your father’s or grandfather’s business cycle. This stuff is secular not cyclical. But our esteemed economic leaders continue to tell one another this is simply cyclical stuff. The usual mix will fix it. Hello! Knock-knock! Is anyone home up there?

Adjusted Reserves Billions of Dollars

Let’s see … all this money created and sitting in the banks helped so much last time, let’s create more. [See, told you it would be hard to make this stuff up.]

Thus, we’ve dug deep into our bag of econometric analysis tools here at Black Swan Capital and come up with our own equation for the economy; let’s call it the “Keynesian path to failure” equation. It seems the centerpiece of the game now being played:

Failed Fiscal Policy + Failed Monetary Policy [squared] =
Trillions of US Taxpayer $s down a Rat Hole and Below Capacity Growth for a Long Time and Deflation Deepening its grip across our Fair Land

Writes Lacy Hunt and Van Hoisington in their third quarter economic research missive:

The problem with the U.S. economy is fourfold: 1) The economy is grossly overleveraged, with many asset prices falling; 2) fiscal policy is counter-productive and debilitating to economic growth as government expenditure multipliers are near zero; 3) proposed tax increases are already curtailing economic activity and tax multipliers approach -3%; and 4) increased bureaucracy with many new and yet unwritten regulations from the Dodd-Frank bill, along with health care regulations, make business planning nearly impossible.

The takeaway from Hunt and Hoisington are these:

1) There is a good chance we will see another recession
2) If you think we are in a bond bubble you are likely very wrong; long rates go lower from here.
3) You couldn’t make this stuff up if you tried *actually, I made that part up+.

What we would add is this:

At what point do the financial economy (bubble filled with Fed liquidity flowing to risk assets, i.e. stocks here and abroad) and the real economy (the one where we live, at least that one outside Washington D.C., in which our friends and neighbors are losing their jobs and houses and confidence at an ever-increasing clip) going to meet?

Markets can remain over- and under-valued for a longtime relative to the so-called underlying fundamentals. And we appreciate that market prices can impact weak fundamentals in a positive feedback loop. But, given the pathetic state of economic policy now in play running counter to real wealth creation, we wonder if Wile E. Coyote can remain in the air much longer…

Consumer Installment Credit (black) versus Dow Jones Industrial Average (purple):

…all that fiscal and monetary stimulus from our government, yet the consumer is not taking on more leverage. Instead, consumer credit is turning down for the first time since 1943…at least that is all the data we have available…

The first decline in US Consumer Credit since 1943 appears to be secular, not cyclical, to us.

But relax you say, China will pull our rear-ends out of the fire … the world is decoupling don’t you know. Hmmm!

Below is a chart sent to us recently from a friend; it shows China GDP Index (orange) relative to US Consumer Credit (white):

Back to Hunt and Housington again:

With existing excess liquidity in banks and companies, and the above-mentioned key economic problems, it should be clear that QE2 and the purchases of additional assets by the Fed will, like previous purchases in QE1, serve only to bloat excess reserves without advancing income, spending, or jobs. From this point in the cycle, for QE2 to generate expansion, money growth and therefore debt levels would have to rise.

We think Treasury Secretary Geithner has been very clear and correct in his recent statements (refreshing for a change). In essence, the global economy must rebalance and cannot depend on the US consumer saving it. Others must start carrying the ball of global demand. Riding the bucking bronco of exports is over. Consumers are not re-leveraging; this is a secular change in the structure of the global economy.

He also said out loud that a country cannot devalue its way to prosperity. Bingo!

And of recent memory (quickly before it all goes down the proverbial “memory hole” and said perpetrator is rehabilitated by his friends in the media) he is most responsible for the dismal state of affairs we find our self…This is the final Jeopardy question for today …


Yes! Some of you got it. Who is Mr. Larry “I am Somebody” Summers?

We are all still waiting for a public apology which should include at least three deep bows of embarrassment for your abject failure only outdone by the size of your ego. Oh, sorry. I forgot. Being part of the elite Harvard/Ivy establishment means never having to say you are sorry no matter how incompetent you are. For all your cronies will be there to give you yet another great job to screw up. Just ask Robert Rubin if you don’t believe me. [See “Larry Summers and the Subversion of Economics,” appearing in the Chronicle Review.]

In the meantime while, waiting for Larry’s public confession which is highly unlikely to materialize in this lifetime, you may want to tighten your stops on risky assets, hang on to a few of those long bonds, and be ready to jump back into the dollar for at least a risk-bid move. I’d say buy gold—but the stats we see, coupled with the joy in the voice of my father-in-law every time I speak with him, tells me everyone who wants to be in is in.

Gold buyers—I think Larry should be added to your Christmas card list at least.