Economics

Should Puerto Rico Shut Down Schools to Pay Its Debts?

"The hedge fund report, authored by a trio of former International Monetary Fund economists, noted that Puerto Rico’s education spending had risen 39 percent in a decade during which school enrollment actually fell by a quarter. Surely, there must have been some unnecessary fat in the system to cut. It's easy to understand why this might seem outrageous. Firing teachers in the middle of what's essentially a nine-year depression seems like a good way to further exacerbate Puerto Rican unemployment, possibly while sacrificing some childrens' educations." Continue reading →

Continue ReadingShould Puerto Rico Shut Down Schools to Pay Its Debts?

Bank of Canada Admits Recession, The Solution: More Bubbles

"What made the Canadian recession easy to spot was the Canadian yield curve inverted out to three years following a surprise rate cut by the Bank of Canada on January 21. It remains to be seen if the US follows. The US contracted in the first quarter, but the second quarter rebound was a bit stronger than I expected. I awarded Canada the 'Blue Ribbon' for the first yield curve inversion of any major country following the great financial crisis. I smell an 'Operation Twist' type move by the Canadian central bank to rectify this horrific 'recession-signaling' condition. If so, the sweet spot for banks and hedge funds to front-run the trade appears to be 5Y or 7Y notes. Some banks may already be in on it." Continue reading →

Continue ReadingBank of Canada Admits Recession, The Solution: More Bubbles

The One Lesson to Learn Before a Market Crash

"The media incorrectly suggests that the collapse of the market in 2008 began with the Lehman bankruptcy on September 15. The fact is that the market fully recovered to even higher levels the following week as the government banned short selling of financial stocks (much like China is doing more broadly at present). Weeks later, in a wicked case of 'sell the news,' the actual collapse started literally 15 seconds after the TARP bailout was passed by Congress. Investors want to tie market outcomes to very specific events or catalysts. But history suggests a different lesson: once extreme valuations are joined by a shift toward risk-aversion among investors, the specific events become irrelevant." Continue reading →

Continue ReadingThe One Lesson to Learn Before a Market Crash

Loads of Debt: A Global Ailment With Few Cures

"As central banks like the Federal Reserve and the European Central Bank have printed trillions of dollars and euros, markets in stocks and bonds, as well as other types of assets, have responded optimistically, sometimes reaching highs that were unthinkable seven years ago in the depths of the financial crisis. Central banks can make debt less expensive by pushing down interest rates. Crucially, though, they cannot slash debt levels to bring much quicker relief to borrowers. In fact, lower interest rates can persuade some borrowers to take on more debt. Many countries are now in a position where their governments and companies live in fear of an increase in interest rates." Continue reading →

Continue ReadingLoads of Debt: A Global Ailment With Few Cures

John Hussman: All Their Eggs in Janet’s Basket

"Investors whose strategy is to follow the Fed – in the belief that stocks will advance as long as the Fed does not raise interest rates – are free to place all their eggs in Janet’s basket. On the other hand, for investors whose strategy is historically informed by factors that have reliably distinguished market advances from collapses over a century of history, our suggestion is to consider a stronger defense. Our greatest successes have been when our investment outlook was aligned with valuations and market internals, and our greatest disappointments have been when it was not. Both factors are unfavorable at present, and our outlook is aligned accordingly." Continue reading →

Continue ReadingJohn Hussman: All Their Eggs in Janet’s Basket

India gold smuggling at all-time high, despite Nepali kingpin’s death

"In two years--since government increased duty on gold to 10% to rein in a yawning current account deficit—gold smuggling has grown by 900%. That as an accepted principle seizures could be less than 10% of actual smuggling, the figures look even more ominous. Sources say gold has also begun to be smuggled in ever unique ways and from rather unexpected corners. There is a silver lining to the grim story though. There is an unexpected drop in Nepal which had seen a massive spurt in gold smuggling in the past couple of years. The reason: the kingpin of illicit yellow metal trade in the Himlayan nation died under the rubble of his house in Kathmandu during the recent quake." Continue reading →

Continue ReadingIndia gold smuggling at all-time high, despite Nepali kingpin’s death

The Logical Conclusion of the Modern, Monetary Argument

"One of the most terrible things about the globalization of finance, money and industry is that it homogenizes booms and busts. There is literally nowhere to go. As economic centralization continues, these cycles will only worsen. These days in the West – and certainly in Washington – Republicans are sure they can mandate a technocratic interest-rate rule that will restrain the Fed from doing inordinate damage to the economy. Ironically, Democrats argue for more flexibility and less government interference regarding money. This would be admirable from a free-market standpoint except that they are arguing on behalf of a MONOPOLY facility. As usual, both parties get it wrong." Continue reading →

Continue ReadingThe Logical Conclusion of the Modern, Monetary Argument

Fed Hawks Want Rate Hikes Soon

"A trio of inflation hawks at the Federal Reserve — Richard Fisher, Esther George and Charles Plosser — believe it's about time to take the punch bowl away. The three regional Fed bank presidents are on a mission to urge their colleagues to take a tougher monetary policy stance, CNNMoney reported. If they are successful, Americans would be hit with higher rates on mortgages, small business loans and credit cards, and many on Wall Street fear bonds and stocks would also suffer. But the Fed hawks believe the alternative to tighter policy could be high inflation and more dangerous asset bubbles." Continue reading →

Continue ReadingFed Hawks Want Rate Hikes Soon

Sweden’s deflated economy: Sub-zero conditions

"Sweden’s economy, which it oversees, grew three times faster than the euro zone’s in 2010 and dodged Europe’s double-dip recession in 2012-13. The Riksbank felt confident enough in recovery to start raising interest rates in 2010. The Riksbank worried that rising household borrowing and soaring house prices could lead to trouble down the road. It therefore opted to 'lean against the wind', in central bankers’ parlance, and deflate the credit boom before it burst catastrophically. It seems instead to have taken the air out of everything but exuberant markets. Unemployment in Sweden has held steady, while Swedish private-sector debt as a share of GDP is higher now than it was in 2010." Continue reading →

Continue ReadingSweden’s deflated economy: Sub-zero conditions

When Zero’s Too High: Time preference versus central bankers

"Central banking has taken interest rate reduction to its absurd conclusion. If observers thought the ECB had run out of room by holding its deposit rate at zero, Mario Draghi proved he is creative, cutting the ECB’s deposit rate to minus 0.10 percent, making it the first major central bank to institute a negative rate. Can a central-bank edict force present goods to no longer have a premium over future goods? Armed with high-powered math and models dancing in their heads, modern central bankers believe they are only limited by their imaginations. More than half a decade of zero interest rates has not lifted anyone from poverty or created any jobs—it has simply caused more malinvestment." Continue reading →

Continue ReadingWhen Zero’s Too High: Time preference versus central bankers