Dead Meat in Jackson Hole

If there are any virtues of debt instruments with negative yields we’ve yet to realize them.  Certainly, we understand that as bond yields fall, bond prices rise, and bond investors are rewarded with capital appreciation.  But when capital’s appreciating as a consequence of negative yields, we suspect there’s something fundamentally wrong with the capital itself.

Capital markets, as we’ve always understood them, are centered around lenders buying debt – such as a bond – at a yield that compensates for the risk of default over a contracted duration.  The acceptance of negative yield is an abstraction that violates the form and function that capital markets are built on.  In fact, negative interest rates undermine the foundational business model of banking in general.

How can banks loan money if they’re not compensated for the risk that some loans will go bad?  And if banks can only loan money at a loss, why loan money at all?  If there’s no profit motive, what’s the point? Continue reading

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Writing on the Wall

One of the more disagreeable discrepancies of American life in the 21st century is the world according to Washington’s economic bureaus and the world as it actually is.  In short, things don’t add up.  What’s more, the propaganda’s so far off the mark it’s downright insulting.

The Bureau of Labor Statistics (BLS) reports an unemployment rate of just 3.7 percent.  The BLS also reports price inflation, as measured by the consumer price index (CPI), of 1.8 percent.  Yet big city streets are lined with tents and panhandlers grumble “that’s all” when you spare them a dollar.

In addition, good people, of sound mind and honest intentions, are racking up debt like never before.  Mortgage debt recently topped $9.4 trillion.  If you didn’t know, this eclipses the 2008 high of $9.3 trillion that was notched at the precise moment the credit market melted down.

Total American household debt, which includes mortgages and student loans, is about $14 trillion – roughly $1 trillion higher than in 2008.  Credit card debt, which is over $1 trillion, is also above the 2008 peak. Continue reading

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Getting to a Special State of Ugly

There are certain phrases – like “trust me” or “I got this” – that should immediately provoke one’s suspicion.  When your slippery contractor tells you, “trust me, your kitchen renovation will be done before Christmas,” you should be wary.  There’s no way it’ll be done until late spring.

Or when your incompetent client says, “I won’t be needing your services at this time, I got this.”  You should expect a panicked phone call at 5pm on Friday.  “This is way more than I can handle,” your client will say, “take care of it.”

On Monday, when the sky was falling, and there was much weeping and gnashing of teeth, the Chinese yuan weakened to above 7 per dollar for the first time in over a decade.  This prompted U.S. Treasury Secretary Steven Mnuchin to waft out a suspicious phrase of his own.  He called China a “currency manipulator.”

Mnuchin’s logic, as far as we can tell, is that China manipulated their currency because their central bank didn’t adequately intervene in foreign exchange markets to prop up the yuan.  Conversely, direct intervention into markets, to maintain a centrally planned price that’s acceptable to Mnuchin, is not currency manipulation.  Go figure! Continue reading

Posted in Inflation, MN Gordon | Tagged , , , , | 18 Comments

Do You Hear a Bell Ringing?

The sun shines brightest across the North American continent as we enter summer’s dog days.  Cold sweet lemonade is the refreshment of choice at ballparks and swimming holes alike.  Many people drink it after cutting the grass, or whenever else a respite from the heat and some thirst quenching satisfaction is needed.

The economy, after 10 years of growth, appears to be heading for a respite too.  Second quarter earnings, currently being reported by S&P 500 companies, have been a mixed bag thus far.  But in sectors that actually make stuff, like materials and industrials, earnings are suffering double digit declines.

From a practical standpoint, earnings are declining in these sectors because manufacturing is contracting.  For example, this week it was reported that the Chicago Purchase Mangers’ Index (PMI) collapsed in July to 44.4.  That’s the second weakest Chicago PMI reading since the Great Financial Crisis. Continue reading

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