Ivan the Interest Rate

Come senators, congressmen, [central bankers]
Please heed the call
Don’t stand in the doorway
Don’t block up the hall
For he that gets hurt
Will be he who has stalled
There’s a battle outside ragin’.
It’ll soon shake your windows
And rattle your walls
For the times they are a-changin’.

– Bob Dylan

Office update

Things are looking a bit dire around the Port Phillip Publishing offices these days. Dan is lamenting the days when investing was based on economics and not politics. Diggers and Drillers editor Alex Cowie picked up some sort of bowel ailment in Morocco while doing research for his subscribers. Technical analyst Murray Dawes grumbles that he is “watching paint dry” on his various screens (the market has gone nowhere for a year). As for small cap specialist Kris Sayce, nothing could dampen his mood. Ever.

But can you imagine the misery, tension and fear that must be stinking up the halls of central banks and ministerial offices across the western world? The times, they are a changing. Luckily, the editorial team hanging out in St Kilda populate a substantially better verse in the song:

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won’t come again
And don’t speak too soon
For the wheel’s still in spin
And there’s no tellin’ who
That it’s namin’.
For the loser now
Will be later to win
For the times they are a-changin’

Yes, after several years on the lunatic fringe, the past few years have certainly turned things around for those who “prophesised with their pen”. But let’s not dwell, there is plenty more
warning to be done.

“…if the euro fails, then Europe will fail”

Yes, Chancellor Merkel is throwing the dice… of the German taxpayer. If Ireland get’s the bailout, nations will be queuing up. If Ireland doesn’t get bailed out, other nations will be dragged down. So what’s it to be?

The politicians, who got each nation into the mess they are in, have been charged with getting them out of it. “The veteran Conservative MP Peter Tapsell warned that the “potential knock-on effect” of the Irish crisis “could pose as great a threat to the world economy as did Lehman Brothers, AIG and Goldman Sachs in September 2008”.

Hint, hint, nudge, nudge. So yes, a bailout it will be. Maybe not by name, but definitely by nature. Meanwhile Merkel is pushing for bond holders to take some of the hit. Watch the European banks! The ECB could turn into a bad behaviour subsidising agency as the Irish banks need bailing out. Think of it as paying off the delinquents. German Bundesbank President Axel Weber warned of this and it’s materialising.

Informed Debate

Bank bashing has become very confusing lately. Business Day reckons “Australia’s big four banks have fattened their margins while complaining about being squeezed, new figures suggest.” The Australian reports “the RBA said it expected [increases in mortgage rates] because of rising funding costs and had taken them into account in its monetary policy settings.”

Logic tells you that either the RBA or the “new figures” are wrong. Faith in central bankers is never well placed, so let’s look at who came up with the contradicting figures. Oh look, it’s APRA, the Australian Prudential Regulatory Authority (potentially one step worse than the central bank).

Australian Institute director Richard Denniss explains the APRA figures: “It’s like making hamburgers. If meat accounts for a third of your costs and the price of meat goes up 10 per cent, you shouldn’t be expected to put up the price of the hamburgers by 10 per cent.”

The man who first explained APRA to your editor used to say “the Labor party couldn’t run a hot dog stand”. It seems the RBA couldn’t run a hamburger stand. This is where it gets really funny: “The Australian Bankers Association confirmed the [APRA] calculations were correct. But it said they didn’t reflect banks’ actual cost of funds.”

“To be honest we can’t work this out,” said chief executive Steven Munchenberg. “Performing the same calculation we get the same result, but I know it is not right because if it was we would have been being beaten to a pulp with this by the government and the opposition.”

Bankers who can’t calculate their margins, but regulators who can?

Foreign Investment

How’s this for a chart?

Source: FIRB

The concert goers in Mullumbimby may have cheered around us back in 2007 as Kevin of Eumundi got elected. Few of them read the Daily Reckoning between smoking various substances and so few of them knew what was to come. It wasn’t a great time to be elected to say the least.

Now, several years on, Julia is stuck with the impressive jump in foreign investment depicted above. Not that it’s her fault. But how will voters see it?

Under Julia’s formerly preferred system of government (we can’t remember if she was a communist or socialist), the farmers are expected to pay tribute to the workers in the city. At least that was the model used by Soviets and Chinese communists. The result of the consequent policies was a price for agricultural products below costs of producing them. Pretty soon everyone was starving. That’s probably a bad outcome, although some say it was the intended one for Stalin.

Back to Australia, we see that the very same countries that made the mistake of communism, or got dangerously close, seem to be the ones investing in Aussie agriculture. Is it good or bad? That’s up to you. But consider that more investment means more output, which lowers prices.

Crazy Ivan

Stories of the Soviet economic system should be like nursery rhymes to economists. Everyone remembers Humpty Dumpty and so everyone remembers the moral at the end of the story. (Don’t sit on a wall if you’re susceptible to fractures.)

Perhaps it’s their lack of creativity that stops economists from remembering the lessons that history taught them. Maybe a rhyme involving the “Wiener from Weimar” could warn Bernanke of how quantitative easing ends. “Insulation Ingrid” could spark a memory about the effects of stimulus.

Roger Garrison, an Austrian Business Cycle expert, came up with a brilliant analogy, although it doesn’t rhyme. It involves Ivan, who works at the brickyard. His job is to inform his superiors at the Planning Board how many bricks are available for use in housing production.

But the pressure of bearing good news sometimes causes Ivan to overestimate the amount of bricks in the brickyard. If he doesn’t report that there are enough for the Planning Board’s aspirations, Ivan risks a trip to Siberia. So he simply tells his superiors what they want to hear, regardless of the number of bricks actually available.

And so the Planning Board goes ahead and instructs its workers to build houses based on the number of bricks Ivan claims he counted.

Unfortunately, by the time the houses are nearly finished, it turns out that there aren’t enough bricks. So some of the houses have to be torn down to complete the rest. The thing is, when the houses are torn down, some bricks are damaged. That means even less houses can be built than if Ivan hadn’t lied.

First of all, consider that the above metaphor is in fact an accurate depiction of the Soviet economy. But more importantly, if you replace “Ivan” with “the interest rate” and “bricks” with “funds available for investment”, you get an accurate explanation of the financial crisis.

All through the 2000’s, Ivan the interest rate lied to the housing industry and told them the amount of investable funds was much larger than it actually was. A more accurate version would be to say that Alan Greenspan bribed Ivan to lie with freshly printed money. Anyway, the fraud was uncovered in 2007.

But the days of manipulation may be ending. Ivan is doing a “crazy Ivan”. Yes, instead of responding favourably to Ben Bernanke’s bribes, Ivan is signalling that something is wrong. Yields are going up, not down, despite 600 billion in demand from the Fed. And despite concerns in Europe causing a flight into the dollar. And despite purchases by the Japanese and the Chinese. That is incredible.

Wait, a spike in Treasury purchases by the Japanese and Chinese? Yup. Not sure what they’re thinking.

Anyway, the true puzzle is, where is the money going? Treasuries down. Stock markets down. Commodities down. Aussie dollar down. Down down down. The only thing up is the US dollar. It’s all very strange.

Economicus incompitus

There seems to be a bit of confusion at the higher levels of the US government. And that’s putting it very politely. Money Morning Editor Kris Sayce had a rant about the ignorance of the following statement a few weeks ago, made by St Louis Federal Reserve President Bullard:

“The dollar is the Treasury’s policy and we have to let the Treasury Secretary run that policy… It belongs to the Treasury, it’s the Treasury’s policy and we try not to comment on it or interfere with it.”

President Obama echoed those thoughts recently with an equally ignorant analysis of the Federal Reserve’s 600 billion QE: “This decision was not one to have an impact on the currency, on the dollar.”

Why do these people not understand that their intentions are completely irrelevant? And it is irrelevant who determines the “policy”. The effect of printing money will be what it is. Regardless of what they say, or who does it. And part of that effect will be a falling dollar, all else equal.

Coming up with a worthy metaphor for just how ignorant these comments have been is proving elusive. It’s just really ignorant.

Ignorance is excusable though. This is not: The American President, it seems, was never aware of the concept called “the rule of law”. He has granted, so far, 111 waivers from his landmark health care legislation. One of them is for obesity provider McDonalds. Yes, healthcare bill – Mc Donald’s – waiver.

Didn’t hear about all this on the news? That’s because there was no press release, according to this news channel.

Farewell Welfare

Apparently members of the communist party protested outside the Greek parliament while Eurostat released an estimated Greek deficit substantially higher than first thought. That estimate was of 2009…

But we won’t focus on the performance of statisticians, even when they are a year late. Instead, consider why the commies are daring to show their face on the street. Seriously, after being swept up in benefits for years, they are protesting? Do they want the policies to continue? Who will pay for that? The money has to come from somewhere. It’s a basic truth. And yet people seem to think they are entitled to things. As though they come out of thin air. Don’t they know they live in Europe and not the US?

Even after borrowing huge amounts to fund the lifestyles of some, the protesters are not content. Imagine when they realise that, not only will the benefits stop flowing, but payments must be made for past splurges. It won’t sit well.

Still, as a good natured person, we wouldn’t deny them their desire for communism. Just not at other people’s expense. Why not start up a little communist community on some Greek island and see how that goes?

Commodity Margins

Wondering what’s gotten into commodities lately? Well, the CME raised margin requirements left right and centre for the various commodities traded on its trading systems. That’s causing some falls in commodity markets, because it costs more to hold positions. The big names seem to see it as a massive buying opportunity, with many hedge funds buying into the falls.

Even Weddings are Stimulus Now

The German newspaper Der Spiegel carries the following title: “Bread and Circuses for the Bankrupt Brits”. No kidding, the editors sniped at the Royal Family and the UK’s economy at the same time. The Brits themselves have a far more Keynesian slant on things: “Royal wedding will boost British economy by £620m“.

Once again, nobody ponders that the money could have been spent elsewhere instead. Like on the British car exporting industry. Heh.

On the Road Again

Statistics from the US reveal a migration from high income tax states to low income tax states. The intriguing part is that this trend will show up in Congress, with low income tax states picking up Congressional seats from their high tax neighbours as a result of the population shift.

So while things are changing for the better in the US of A, they still have a way to go. Freddie Mac illustrates the point, with its best quarterly performance in a year – a $2.5 billion loss…

Until next week,

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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6 Comments on "Ivan the Interest Rate"

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There is nothing new in the theory of “first use of printed money” but the idea after Volcker and the extra super sized USD pot go around after they offshored the consumer production of the biggest world economy and ramp consumerism itself and run massive private and government deficits, and you have the printing press for global reserve currency which denominates half the input prices for that offshored production, well then you can kick that inflationary feedback velocity along way down the road (for a while). Its only people who own US assets, make offshored things at a trading loss,… Read more »
Biker Pete

Ross: “Deflation versus Inflation and in what order?”

Inflation, without a doubt. It is eternal… .

When I was a kid, my mother would send me down to the corner store with ten shillings (a dollar) and I’d come back with five bags of potatoes, two loaves of bread, three bottles of milk, a hunk of cheese, a box of tea and a dozen eggs. You can’t do that now.

Too many f*ckin’ security cameras… .


Ha ha BP :)

This was funny too and puts some good points in to simple format



I’m not sure nominal wages have gone up in the US unless you work for Goldmans, JP etc. Crumbs Ross I think democracy is impossible or at least temporary at best. Nothing new under the sun.

Sorry Ross that I haven’t had the time to respond to article link until now – a short one at that, too busy. There is so much noise out there I find that I have to rely on a few that have a ‘good’ track record – not perfect, but good – for objective analysis. As mentioned the only paid subscription I have is with James Stack at Investech in Montana. In his latest newsletter he wrote: “The simple fact is that this is still a bull market. Virtually all market indexes have hit new recovery highs this month. The… Read more »

If there were good odds on rhyming omens Watcher I’d take them! cheers

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