"Truth to Power!!!"

I am anything but a fan of Donald Trump, still I am among the few in my social circle who doesn’t suffer a level of derangement at the mere mention of his name.  Hence, the irony in my title to this post.  Nevertheless, I am happy to point out when he is lying or wrong.  In his pursuit of China, his consternation with their trade policies, IP theft, and other misgivings is justified.  But, his response is misguided, and, more specifically, his interpretation of the data is exaggerated.  In George Magnus’ book Red Flags, one particular data point often volleyed around is clarified to the President’s detriment:

“Yet, this $370 billion US trade deficit with China is not all strict bilateral trade, because China, as Asia’s prime supply chain hub, finishes off a lot of products shipped there by, say, Japan and South Korea.  According to the value-added trade data of the Organization for Economic Co-operation and Development (OECD), which allows for this sort of effect, the US trade deficit with China was just $150 billion in 2017, and once you allow for the US surplus in services, the total deficit was about $110-$120 billion.  This doesn’t mean the Americans don’t have legitimate arguments about Chinese trade and investment practices, but it is important to bear this in mind in assessing the bluster that often passes as trade policy.”

"The Russians are coming! The Russians are coming!"

While I don’t watch the news or read the newspaper, I am keenly aware that Putin Derangement Syndrome has gone next level lately, particularly among the Democrats in Washington.  While I believe that an opposition is an important feature of our system, I think the distinction needs to be made between offering an alternative versus simply trying to re-write history and re-litigate the election.  Needless to say, I don’t think the angle currently being pursued is going to dethrone Mr. Trump in 2020.  And, as always, the folks at Geopolitical Futures offer a healthy and reasoned perspective on what the story really is with respect to Russia:

“The media and Trump’s opposition present this openness toward dialogue and Trump’s own personal admiration for Russian President Vladimir Putin as evidence of his collusion with Russia.  But the only difference between Trump’s approach to Russia and that of his predecessors has been style, not substance. A year after Russia undermined confidence in U.S. security guarantees in the 2008 Georgian war, U.S. President Barack Obama’s administration tried to “reset” Russian relations. It failed miserably. President George W. Bush said in 2001 that he had met Putin, looked him in the eye, gotten “a sense of his soul,” and found him to be straightforward and trustworthy. Bush got it wrong too.

U.S. presidents always try to improve the relationship with Russia, and they always fail. In this sense, Trump is typical. Part of the reason successive U.S. presidents keep making this mistake is that presidents, like the electorate, tend to personalize everything. Trump wants to get along with Russia; Obama wanted a fresh start; Bush felt he knew Putin’s soul. They view Russia as something that can be handled by sheer force of personality. But the individuals and their personal preferences don’t matter, which is something Russia understands better than the United States does. Relationships between countries aren’t like relationships between people. Countries can’t be trusted to act any way except in their own self-interest.

U.S. presidents have been unable to improve U.S.-Russia relations because the two countries have opposing interests… [Russia] is a highly vulnerable country. To protect its core – around Moscow – from potential enemies, it must expand outward into Central Asia, the Caucasus and Eastern Europe to develop buffer zones. (The U.S. is fortunate to have the Atlantic and Pacific oceans protecting it.) Russia will always push to have control over these areas, no matter who is serving as its president. If a liberal democratic revolution were to usher an opposition figure like Alexei Navalny into power tomorrow, or if Trump were impeached next week, the U.S. and Russia would still be at odds in the exact same parts of the world…

Despite the allegations of collusion against members of the Trump administration, the U.S. has not softened its policy toward Russia in Eastern Europe. Much has been made of Trump’s tough line on NATO, but the U.S. continues to solidify bilateral relations with countries like Poland, Romania and the Baltic states, all of which are crucial to establishing reliable defenses against potential Russian aggression. A U.S. armored brigade deployed to Poland as scheduled right before Trump’s inauguration and has not been withdrawn. Trump met with Romania’s president on June 9, and he plans to visit Poland in early July. Secretary of Defense James Mattis was in Lithuania last month. And Ukrainian media have reported that President Petro Poroshenko will visit Washington on June 19-20. Contrary to the media narrative, Russia’s position in Eastern Europe is weakening.”

Paris Agreement

Far be it for me to act like any kind of expert on climate change, but I do get amusement out of the outrage at Trump’s “incomprehensible” decision to withdraw from the Paris Agreement – mostly because the accords themselves were largely symbolic and without any real teeth to enforce the proposed mandates.

The United States is already a country that has reduced its carbon footprint because it stands at the forefront of technological innovation – the problem really lies with China and India, countries that are looking to emulate the United States but with far larger populations, and who will no doubt allow their economic imperatives to trump any stipulations that the Paris Agreement may announce.  To that line of reason, I think Stratfor summed it up well: “Geopolitical forces, rather than international deals, have shaped the United States’ incorporation of cutting-edge technologies since long before Trump was elected, and they will continue to do so long after his tenure ends.”  Thus, I don’t think there is real risk to the United States’ withdrawal, and it does not mean that the conversation about climate change and how to address it will end.  Nevertheless, I don’t think the current environment is conducive to that kind of nuance and reason, so instead we will just get vitriol and hot air about what to make of the situation.

More on that Economic Boom

Courtesy of the folks at Zero Hedge, we know that over the last three months, the U.S. has gained 638,000 part-time jobs and lost 99,000 full-time jobs.  But, by all means, the stock market should be going gangbusters, and the media should be putting out articles like this...

More Reaction

Starting with the markets. After Trump won (which wasn’t supposed to happen), the stock market made an impressive move higher (which also wasn’t supposed to happen). The interesting cross-current, though, was how much interest rates moved up as well (in another clear example of how the Fed is not bigger than the market). Part of the “explanation” is that Trump’s anti-regulation, lower tax policy stance, within the backdrop of a Republican-controlled congress, should be good for growth. But, to my thinking, stocks were already very over-valued, and the debt problem did not suddenly go away. If these immediate reactions remain the trend, and don’t reverse, higher rates will have an impact at some point. That I believe.

As for the whining post-election, I chalk it up to my favorite internet meme: “When everybody gets a trophy, nobody knows how to lose.” To be clear (for the millionth time), I am not a fan of Trump, and as much as I do not like Hillary, I still couldn’t hold my nose and vote for the guy. But, any notion that the popular vote is more indicative or important than the Electoral College outcome is just ridiculous. Everybody knew the rules going in. As a result, the candidates campaigned so as to win the Electoral College, not the popular vote. Moreover, I am not even sure that the popular vote outcome is truly informative anyway. Sure, at a minimum, it tells us that the country is highly divided, but we also know that the existence of the electoral college structure in the first place means that plenty of people think that their vote holds very little value (I live in New York City and there was no difference in the election results whether I voted Clinton, Trump or not at all). Just consider that only 53% of eligible voters participated – the non-voters actually won the election by that metric. Therefore, it’s hard to argue that the popular vote tells us anything of import. But, everybody likes to have something to complain about. And in the land of safe spaces, winning the popular vote is something to hang on to.

Job Story

An interesting read on the Obama "boom".  In particular, this chart tells a story that the media often glosses over:

End the Myth

So Warren Buffett released information today about his most recent tax returns as something of a "touche" to Donald Trump.  In the primordial visual signaling echo chamber that is my facebook feed, it was gobbled up like the gospel and proof positive of...well, I'm not really sure.  I don't have any dog in this hunt, and have known for years that Trump is a lowlife.  Yet what Buffett described only makes me think that Mr. Trump was right -- the richest of the rich have plenty of opportunities to pay "way less than their fair share."  More generally, though, it still bothers me that Uncle Warren continues to get the royal treatment amongst the uneducated masses.  But we know better.

Let's start with the basic overview.  The guy is worth $70Bn and his AGI was $11.6M?  And his effective tax rate was 16%?  So, essentially, he paid less than .001% of his net worth in taxes -- that's not a terribly impressive ROE.  So, right away we know that he did something creative.  And that's kind of the point, everyone at that level of wealth does it.  And without seeing the actual return, there is no way to know what Buffett actually did from an accounting standpoint.

Regardless of that, the history is there to prove out that Mr. Buffett is a "tax evader".  For the first 70 some-odd years of his life, he paid de minimis taxes by taking advantage of the rules.  Never paying dividends, rolling all the free cash flow that Berkshire made back on to the balance sheet, never selling any shares and paying capital gains.  All acts that fall within his rights.

And then, of course, he made the decision to give all his money to a non-profit run by his buddy.  How charitable.  But, play it out.  He is a big proponent of everyone paying their full share and 50% inheritance taxes -- yet the guy with the biggest tax bill around won't be paying a dime.  And could we also say that the subtext here is that he, and all the other billionaires who made the same pledge, don't have the most faith that their money will go the furthest if it's handed off to Uncle Sam?

Anyway, none of that makes him a bad guy.  But he definitely is not a saint either.

Sanity Check

Courtesy of FiveThirtyEight:

When Hillary Clinton laid out her economic vision for her prospective presidency in a speech last July, she made sure to work in a shoutout to her husband’s economic record as president. “The results speak for themselves,” Clinton said. “Under President Clinton — I like the sound of that — America saw the longest peacetime expansion in our history.”

Now Clinton is doubling down on that message. On Sunday, she told voters in Kentucky that she would put her husband “in charge of revitalizing the economy” because “he knows how to do it.” Aides subsequently told The New York Times’ Amy Chozick that the former president would more specifically focus on parts of the country that are struggling.

Whatever Bill Clinton’s exact role in a Hillary Clinton administration would be, it’s no surprise that she is looking to tie herself to his economic legacy. Bill Clinton’s second term was the last time the U.S. economy was unequivocally strong; for most voters this November, it was the best economy they’ve ever known. But while Hillary Clinton wants voters to look back fondly on the first Clinton presidency, she should hope they don’t remember too much about what happened next.

The economy at the end of Bill Clinton’s term was really, really good. In 2000, the final year of his presidency, the unemployment rate dropped below 4 percent for the first time in three decades, while the share of adults that were working hit an all-time high. Wages rose steadily. The stock market soared. The budget deficit turned into a surplus. Inflation, much to the surprise of many economists, stayed under control.

Perhaps most importantly, the late 1990s were a period of shared prosperity. The strong labor market drove up wages for workers throughout the earnings ladder, while drawing in people who traditionally struggle to find work, such as convicted felons and the disabled. The racial wealth gap narrowed. Inequality continued to rise, but families of all income levels saw gains.

The bursting of the tech bubble in 2000, and the subsequent recession, revealed that the 1990s boom was, at least to some degree, a mirage, the result of cheap money and, in then-Fed Chairman Alan Greenspan’s famous phrase, “irrational exuberance.” The recession that followed the tech bust, however, was relatively mild. If that were the worst consequence of the Clinton era, it might seem a small price to pay for a decade of solid growth.

But the Clinton boom, and even some specific Clinton policies, also helped sow the seeds for the far more severe Great Recession of the late 2000s. Mortgage-backed securities and subprime loans weren’t invented in the 1990s, but they expanded greatly during the period, part of a broader “financialization” of the U.S. economy that contributed directly to the severity of the Great Recession. Critics on the right argue Clinton-administration policies promoting increased lending to low-income and minority applicants contributed to the subsequent bubble; critics on the left, including Bernie Sanders, argue that Clinton’s deregulation of the banking industry paved the way for the crisis.

Bill Clinton deserves, at most, a small sliver of the blame for the financial crisis. But he probably doesn’t deserve much credit for the late-’90s boom, either. The reality is, presidents have at best limited influence over the economy. Clinton’s economic policy was determinedly centrist: modest tax increases, free trade (including the signing of the North American Free Trade Agreement) and limited government regulation and spending (the latter due in part to the Republican Congress). Those policies no doubt affected the economy, for good or bad. But their impact pales in comparison to that of forces beyond Clinton’s control: the rise of the internet, the entrance of the baby boomers into their peak earning years, the “peace dividend” that came from the fall of the Soviet Union.

It is a stretch, then, for Hillary Clinton to argue that her husband — or anyone else — “knows how” to ensure a good economy. But there are still lessons to take from the late 1990s. Most importantly, that low unemployment is crucial to generating wage gains for low-income workers — and that a period of such low unemployment need not lead to runaway inflation. The surest way to create an economy that works for everyone is to make sure that anyone who wants one can have a job.

The False Narrative

Per David Sikora:

The availability of financial information and "new economy" companies created intense upward pressure on stocks from all sectors as the world ushered in a new millennium. Between 1994 and 2000, the Dow Jones industrial average exploded from 3,834 to 10,786, while the Nasdaq jumped from 751 to over 4,000. Over the same period, the value of shares traded on the New York Stock Exchange increased nearly fivefold, from $2.45 trillion to $11.06 trillion, though even it paled in comparison to the value of shares traded on the Nasdaq, which grew ninefold from $1.45 trillion to $20.40 trillion.

The flurry of stock trading that took place over this period created sizable short- and long-term capital gains, delivering the windfall that led to the federal government's budget surplus. These were unusual circumstances that political leaders just happened to be in the right place at the right time to oversee — not the result of a coordinated set of policies implemented by the Clinton administration, or by elected officials from either party for that matter.

As the presidential campaign season heats up, we will undoubtedly hear candidates advocate higher taxes on American citizens, arguing that greater taxation on productivity will not drive behavioral change but will inexorably bring the country back to the golden age of budget surpluses we enjoyed when Clinton was in the White House. But without an innovation as profound as the Internet, higher taxes on Americans — who themselves are often job creators — could be more of a dangerous drag than surefire solution for the U.S. economy.

Follow His Lead

The other day I posted a presentation from Kyle Bass and emphasized his comments on Japan. Even earlier in the video, he talked about the U.S. and mentioned the problems in front of Yellen, by virtue of tying the Fed Funds rate to unemployment levels – specifically, given the way the U.S. calculates it unemployment rate, the 5.5% bogey might be hit very soon, even as the economy remains in the toilet.

Lo and behold, a big "upside" surprise in the NFP today dropped the rate from 6.6% to 6.3%. But, on the heels of a very bad Q1 GDP print, and with an NFP report that was really pretty lousy beneath the surface, Mr. Bass seems to be on the money again.

As for that payroll report, I defer to Zero Hedge to enumerate all the problems:

-More people dropping out of the labor force

-Bad results for workers aged 25 to 54

-Since February 2010, workers have been dropping out of the labor force at a faster pace than jobs have been created

Etc, etc...

Notable Comments

A recent addition to my regular reads is the weekly note from Ben Hunt at Epsilon Theory. In this week’s issue, he tackles how politics have corrupted economic theory. And in getting there, he has a couple of observations worth repeating:

“Suffice it to say that it’s not a coincidence that Social Security is a child of the Great Depression in the same way that both QE and Obamacare are children of the Great Recession. The institutionalization and expansion of centralized economic policy is what always happens after an economic crisis, but the scale and scope of QE and Obamacare, particularly when considered together as two sides of the same illiberal coin, are unprecedented in US history.”

and…

“In exactly the same way that French kings in the 13th century used ecclesiastical arguments and Papal bulls to justify their conquest of what we now know as southern France in the Albigensian Crusades, so do American Presidents in the 21st century use macroeconomic arguments and Nobel prize winner op-eds to justify their expansionist aims. Economists play the same role in the court of George W. Bush or Barack Obama as clerics played in the court of Louis VIII or Louis IX. They intentionally write and speak in a “higher” language that lay people do not understand, they are assigned to senior positions in every bureaucratic institution of importance, and they are treated as the conduits of a received Truth that is – at least in terms of its relationship to politics – purely a social construction.”

Another new member to the roster is Michael Pettis, who writes a blog about China from a financial perspective. In a piece from last month, he addresses the interesting topic of the PBoC’s huge foreign reserves and why they are not really a safeguard in the event that Chinese banks need to recapitalize. To wit:

“A much more important objection is the idea that reserves can be used to clean up the banks (or anything else, for that matter) is based on a misunderstanding about how the reserves were accumulated in the first place. There seems to be a still-widespread perception that PBoC reserves represent a hoard of unencumbered savings that the PBoC has somehow managed to collect.

But of course they are not. The PBoC has been forced to buy the reserves as a function of its intervention to manage the value of the RMB. And as they were forced to buy the reserves, the PBoC had to fund the purchases, which it did by borrowing RMB in the domestic market.

This means that the foreign currency reserves are simply the asset side of a balance sheet against which there are liabilities. What is more, remember that the RMB has appreciated by more than 30% since July, 2005, so that the value of the assets has dropped in RMB terms even as the value of the liabilities has remained the same, and this has been exacerbated by the lower interest rate the PBoC currently earns on its assets than the interest rate it pays on much of its liabilities.

In fact there have been rumors for years that the PBoC would be insolvent if its assets and liabilities were correctly marked, but whether or not this is true, any transfer of foreign currency reserves to bail out Chinese banks would simply represent a reduction of PBoC assets with no corresponding reduction in liabilities. The net liabilities of the PBoC, in other words, would rise by exactly the amount of the transfer. Because the liabilities of the PBoC are presumed to be the liabilities of the central government, the net effect of using the reserves to recapitalize the banks is identical to having the central government borrow money to recapitalize the banks.”

Mr. Pettis has another recent post about Abenomics in Japan and why if it succeeds, it still might fail. Here’s the punchline:

“Japan’s enormous debt burden was manageable as long as GDP growth rates were close to zero because this allowed both for the country to rebalance its economy and for Tokyo to make the negligible debt servicing payments even as it was effectively capitalizing part of its debt servicing cost. If Japan starts to grow, however, it can no longer do so. Unless it is willing to privatize assets and pay down the debt, or to impose very heavy taxes of the business sector, one way or the other it will either face serious debt constraints or it will begin to rebalance the economy once again away from consumption.

As this happens Japan’s saving rate will inexorably creep up, and unless investment can grow just as consistently, Japan will require ever larger current account surpluses in order to resolve the excess of its production over its domestic demand. If it has trouble running large current account surpluses, as I expect in a world struggling with too much capacity and too little demand, Abenomics is likely to fail in the medium term.

Perhaps all I am saying with this analysis is that debt matters, even if it is possible to pretend for many years that it doesn’t (and this pretense was made possible by the implicit capitalization of debt-servicing costs). Japan never really wrote down all or even most of its investment misallocation of the 1980s and simply rolled it forward in the form of rising government debt. For a long time it was able to service this growing debt burden by keeping interest rates very low as a response to very slow growth and by effectively capitalizing interest payments, but if Abenomics is “successful”, ironically, it will no longer be able to play this game. Unless Japan moves quickly to pay down debt, perhaps by privatizing government assets, Abenomics, in that case, will be derailed by its own success.”

Courtesy of Stratfor, I found this feature of Chilean governance to be incredibly interesting:

“Economically, Chile has an institutionalized monetary and fiscal policy, which means that politicians are limited in their ability to tamper with macroeconomic fundamentals. Of particular note is the countercyclical fiscal rule, which essentially dictates that politicians are required by law to save copper proceeds in sovereign wealth funds during booms but are allowed to use deficit spending during downturns.”

And, finally, here is the Zero Hedge article that examines the recent revelation of manipulation of the jobs reports by the Census Bureau, including the one just before Obama got re-elected in 2012 when the unemployment rate dropped meaningfully under 8.0%.

October Jobs

The BLS report came out with 204,000 new jobs for the month, nearly double the consensus estimate.

However…

-The household survey showed a drop of 623,000 full-time workers and 127,000 part-time workers – so much for trying to extrapolate the September numbers that showed an unexpected (and apparently one-time) surge in full-time workers

-No shock, but nearly half the headline number consisted of low-wage jobs (retail, hotel, temps)

-The participation rate dropped to 62.8%, reflecting a loss of 932,000 people from the labor force and the lowest rate since 1978

But, by all means, let’s get very excited about a robust recovery.

"Once more unto the breach..." (Redux)

Around the blogosphere, some of the usual suspects are referencing the WWII “boom” as conclusive evidence in favor of implementing Keynesian fiscal stimulus measures right now. Which strikes me as a totally misleading narrative. The sequence of the war was more like this…rationing and hard times, many people killed, and that condition persisting for as long as the war did. It was only after the war, and when government got out of the way, that life started to improve again.

Putin's Play

Another day, another interesting piece from Stratfor on the Syria situation, focusing this time on what Russia is actually trying to accomplish. Missed in all the brouhaha, Putin this week announced budget cuts in response to signs of a weakening domestic economy. So, it would seem, separate from Russia’s hollow attempts to seem like a rival and challenger to the United States (which in reality they are not – economically, militarily or politically), his noise about Syria and writing an op-ed in the NY Times is also a show for his domestic audience to distract from the more pressing problems at home. Therefore, consistent with my thesis about what drives politicians to act, EVERYTHING is about economics.

Catching Up

Other than a quick book review, I’ve been negligent in my posting duties lately. Consider this one an effort to get current on what’s happening.

-From our original note on August 8th, when the price of gold was $1,312, the yellow metal has gone up 8.2%, in the face of declining markets everywhere else. And it seems that the momentum is back with the bulls. Not that we ever had any doubts, right?

-Syria appears to be a fiasco in the making. Stratfor offers a decent explanation when they write that Obama has to respond, since chemical weapons represented his “red line” when it comes to U.S. intervention. So, if he does nothing, it encourages bad behavior from folks all over the world. But, let’s be honest, the rebels are just as brutal as Bashir al-Assad’s crew and are aligned with Al Qaeda. Why would we want them to win? And why does the U.S. have to be the global enforcer? It never turns out well. So, looking for more, the conspiracy theorist in me thinks it’s about economics. The budget deficit is smaller this year than expected, and military spending is the easiest way to goose the fiscal side and engender GDP.

-The stock market looks extremely vulnerable, with the head (of a proposed head-and-shoulders) coming together very nicely. In fact, it looks to be happening even faster than I thought. I am waiting on any short plays until the right shoulder is mature.

-As for bonds, between the war talk and a weak stock market, we should expect some useful information to be revealed on where we are in the transition from a secular bull to a secular bear – or put differently, where we are on the road to a funding crisis.

I think that hits on a lot of it.

More Parlor Tricks

The GDP number came out this week - the first iteration since certain changes were made to how it would be calculated.  It's all about goosing the outcome.  Take one shining example that seems particularly absurd given recent events.

Pension fund benefits are now classified as investments rather than as an expense.  Moreover, the value to be attributed for GDP is the future proposed benefit, not just today's cash outlay.  What does that mean?  So, let's assume that Microsoft has some sort of pension plan.  The company contributes $10 today with the expectation that the money can earn 8% per year, so that in 20 years the employee stands to get something like $40.  That future benefit of $40 is now what the GDP number will incorporate.

That decision takes ridiculousness to another level.

All you have to do is occasionally read some financial papers or websites to get smacked upside the head with an article about how practically every corporate and government pension plan is underfunded.  Which means they are not hitting their return targets such that they will be able to pay out the expected benefit.  Which makes the choice of promise over actual contribution silly.

And, if you don't believe me, just ask Detroit.

Fundamentals?

I came across this really interesting chart regarding 2013 and 2014 EPS forecasts by region and globally.  Note the very pronounced move from upper left to lower right.  Which strikes me as a bad thing.  Then, in your head, contrast it with the typical stock chart.  If you're having trouble, the basic gist is a move from lower left to upper right -- going up.  Is that how it should be? (Consider that last bit to be rhetorical.)

To further contextualize it for you, Alcoa recently "beat" street estimates by showing EPS of $0.07 this quarter instead of $0.06.  But, bear in mind, the forecast has steadily been going down over time.  Last year it was $0.30.  Last month it was $0.10.

Draw your own conclusions.

Peeling Back The Onion

A quick note about Friday’s jobs report, which showed 195,000 jobs added in the U.S. during the month of June. I think there’s only one thing worth focusing on – the household survey reported that part-time jobs increased by 360,000 while full-time jobs decreased by 240,000. Quite the divergence. Land of the free and home of the marginally employed. Did someone mention recovery?

(h/t Zero Hedge)

More Mendacity

Economist Noah Smith has a recent blog post in which he looks at Paul Krugman’s predictive powers the past few years, and specifically why he has been right and the Austrians / gold bugs / faux conservatives have gotten it wrong with respect to interest rates, inflation, etc.

While Krugman likes to credit the IS/LM model, Smith writes that it’s something else, since the model is more about guiding policy and is not meant to forecast what the reaction of the economy will be to policies like QE2. So, despite his own appeals, Krugman is not getting it right because he uses one of the basic Keynesian models. No, Smith says, it’s actually because Krugman understands the dynamics taking place in Japan over the past 20+ years, and sees that the US very much resembles it in the period following 2008. Therefore, despite huge QE measures and higher levels of debt, inflation simply is not going to get traction.

Of course, you know I disagree.

First off, the claim about inflation is only part of what the contra-Krugman contingent represents. It also very much believes that the QE measures and fiscal steps will not generate growth. And, so far, they’ve been right. Krugman, even though he always like to hedge by saying that what has been done is not enough (how convenient), is supportive nonetheless of these policies as steps in the right direction.

The second part, about inflation, is a different beast. Yes, part of the narrative is that interest rates will ultimately rise, but another and larger consideration for the counter-position is that easy money policies engender bubbles that ultimately have to burst. So, while the CPI tells us that inflation is nowhere near out of control, it sure does strike me as inflation when I look at the stock market (despite weak underlying fundamentals), or see how frothy things are getting in the multi-family space (where I play on a regular basis). The “trolls”, as Smith describes them, think that sustainable recovery is not possible in a manipulated economy where the Fed keeps rates low, and that the ultimate consequence is more pain.

(Side-point: Krugman and others like to point to interest rates as a measure of something, but seem to ignore how rates are where they are because of interventions – or are we to believe that rates would be even lower without these policy steps. After all, they don’t think rates should be raised, so are they suggesting that rates would go up or down without the QEs?)

When and where inflation comes cannot be predicted in advance, but by the measure of food and energy prices, it has gone up. In terms of financial assets, it has gone up (something you did not see in Japan, given that Mr. Smith thinks it is such an apt comparison). In addition, we know that the social dynamics in Japan are far different. Higher levels of savings, a Central Bank that generally reverts to a deflationary stance when things start to heat up, very few foreign creditors – none of which are the case in the U.S. I would also point out that the BOJ has finally started to act more like the Fed recently. And what have we seen? Much greater volatility in JGBs, a surging Nikkei, and a much depreciated currency.

Hmmm.

Paul v. Paul

If I wasn’t already convinced that he mixes a political agenda into his explanation of economics, his work this week certainly would’ve pushed me over to that side.

In Friday’s NY Times, Paul Krugman had a piece entitled “Lust for Gold” in which he criticizes so-called conservatives for embracing gold, both as a safe asset and for suggesting a return to the gold standard. His beef is that political actors were pushing it as protection against money printing. No, he writes, we have not seen inflation and there is no indication that we will see anything remotely problematic come from a discretionary monetary policy, except perhaps that it will be stymied by the right-wingers. He offers some other polemics, but it’s just not worth responding to. Still, in the course of doing all that, he does admit that gold can be a good investment as it is like a “very long term bond that’s protected from inflation”. Remember that last bit, because it’s important.

Now, go back to Thursday, and on his blog he writes a piece explaining why he is so supportive of the recent BOJ announcement concerning aggressive new policy measures. Specifically, he endorses it because “[i]f investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy.” In other words, the central bank can “credibly promise to be irresponsible”.

Do you see what just happened there? The first day he explains that all this money printing is intended to create inflation, and in a manner where people believe that it will be done irresponsibly. The next day, while admitting that gold is a good inflation hedge, he suggests that anybody who has been buying it in the past few years either suffers from a case of bad economics or bankrupt morals. Does that strike you as bizarre? Sometimes I wonder if this guy keeps track of everything he writes, or maybe it’s just two different people taking turns on alternate days. Whatever it is, it won’t help anybody to navigate what’s coming.