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By Sean Corrigan, on 5 October 09
Sean Corrigan’s Material Evidence: bond yields, new money, state borrowing and the difficulty of making sound business decisions in the present environment.
 Material Evidence 2009-09-23 Read the report here.
By Sean Corrigan, on 30 September 09
Sean Corrigan’s Material Evidence: the declaration of the end of the recession vs cries of crisis, the role of business spending, new money, the divorce of stock prices from reality and commodities.
 Material Evidence 2009 09 16 Read the report here.
By Sean Corrigan, on 28 September 09
Sean Corrigan’s Material Evidence: US unemployment, the UK’s staggering recovery to 1974 levels of manufacturing output, energy investment and the performance of gold and silver.
 Material Evidence Read the report here.
By Sean Corrigan, on 21 September 09
Sept. 17 (Bloomberg) — Private investors in China, the world’s largest metals user, have stockpiled “substantial” quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.
Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That’s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.
Many of us will have chuckled over the story that Chinese farmers are piling up base metals next to the barnyard muck-heap and as we do we will all be guilty of condescending to those sucked into a speculative whirl created when hot money met the Asian gambling instinct, forgetful of the fact that – though we have a penchant for intangibles rather than things you can stub your toe on – we are just as much at fault ourselves and for the very same reasons, to boot.
For, if we look behind the surface, we must see that our Oriental Farmer Giles’ actions are not exactly an irrational response to the vast monetary over-supply prevalent in a China where prospectively profitable outlets for all that ’stimulus’ money are in decidedly short supply. The result is a ‘Flucht in die Sachwerte’ as Mises put it – a “flight to real values”.
We can already see that the brief stock market pullback which occurred when they feathered the throttle earlier this summer has completely terrified the Chinese authorities – helping them realize they have what Hayek called a ‘tiger by the tail’. By this we mean that they know no good can come of holding to their present course, but that they are also aware they will be instantly eaten alive if they dare to let go. As a result, PboC Vice Governor Su Ning was on the newswires today talking of continuing the present ‘moderately loose policy’ – i.e., naked inflationism – out into 2010. Heaven help us all!
But no illusions of Occidental superiority should be allowed to intrude, for we cannot expect our worthy central bankers to be any less pusillanimous when their turn comes to act – for all the current rumour-mongering about tough talk behind closed doors at the Fed.
As we said almost from Day One of the crisis, Bernanke’s utter misreading of the 1930s has fixed the Fed’s ‘mistake’ of 1937 just a large in his sights as that of 1930. Needless to say, while they focus on the drama of that one, blighted decade, he and his peers completely neglect the whole sad chronicle of mistakes committed during the years 1913-1929 and 1938-2009, as its flawed doctrines and political biddability have combined to gut the far more pure ‘capitalism’ which preceded the Fed’s establishment and which have promoted in its place the pandemonium of bank-led, crony corporatist welfare we practice so disastrously today.
At present, the main difficulty we face in our own work is that of not being too repetitive in laying out what he have been saying since the Crisis started (and hinting at long before then): namely, that Government activism + central bank accommodation = more money despite lowered levels of direct commercial bank lending to the private sector and that this, in turn, is enough to set the stage for an ill-founded revival in real-side activity.
This, of course, is already proving enough to bedazzle the intellectual goldfish who teem in our waters and it is certainly providing plentiful ammunition for our recently state-sponsored stock promoting class – this even though the upswing is becoming ever more dependent on a government interventionism littered with ‘broken windows’ and scarred with the smoking craters of economic collateral damage. Furthermore – and much sooner than anyone really credits it – it will also result in higher goods prices despite the presence of the so-called ‘output gaps’ (i.e., the many abandoned factories, deserted shipyards, uncompetitive vehicle assembly lines, and dust-blown construction sites) which, despite their evident disutility, are deemed to offer a safety valve, according to the tenets of Keynesian Groupthink.
As a result, it is very likely – if not quite fully guaranteed – that we have, as predicted, avoided our 1931-33 reprise. So, let’s hand it to those recidivist drunk drivers, Ben and Merv and Jean-Claude, for being canny enough to ferry some of their victims straight to the local hospital in the hope of impressing the judge at their hearing.
The sad truth is that, whether we are spared our mini-1937 moment as the stimulus is wound down (if only in real, not nominal, magnitude, and probably not in its application, per se), or whether the avid desire to avoid the stutter of a ‘double-dip’ is to forego all meaningful attempt at Cold Turkey, the central bankers’ much-acclaimed ’success’ implies that we will fully realise our impoverishment amid a re-run of the stagflationary 1970s instead.
This will come about as a direct result of the way in which the over-extension of monetary loosening and the intensification of an already gross degree of state interference will impede the necessary healing processes of private entrepreneurialism while fostering both a divisive economic nationalism across borders and a febrile social factionalism within them.
To sum it up in a quote:-
“We are currently in a market where government bonds, corporate bonds, industrial commodities, precious metals, major and emerging market stocks are ALL rising while the volatilities and risk spreads associated with of most of the above are falling. This is not a bull market for gold and silver – it’s a bear market for paper currencies, led by the USD and driven by a deliberate, rapid inflation of the narrow money supply almost everywhere you look. Do not expect this policy to be reversed anytime soon”
By Sean Corrigan, on 17 September 09
 Superhighway to Serfdom By kind permission of Sean Corrigan, we make available the September edition of his Resource Ruminations “Superhighway to Serfdom”:
“The danger of modern liberty is that, absorbed in the enjoyment of our private independence, and in the pursuit of our particular interests, we should surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying! They will say to us: what, in the end, is the aim of your efforts, the motive of your labours, the object of all your hopes? Is it not happiness? Well, leave this happiness to us and we shall give it to you. No, Sirs, we must not leave it to them. No matter how touching such a tender commitment may be, let us ask the authorities to keep within their limits. Let them confine themselves to being just. We shall assume the responsibility of being happy for ourselves”
Benjamin Constant, ‘The Liberty of Ancients Compared with that of Moderns’, 1816
…
Imagine, if you will, that we stand today at a cross-roads and that we see to our right a minor road which branches away to climb rapidly upward in an ultra- (even a hyper-) inflationary surge to ruin. On our left, we find a trackway which twists downward, descending rapidly into a Slough of Despond after threading its way past the rusting ironwork, boarded windows, and unfinished building work of a renewed financial crisis and after jolting its users horribly about in the ruts and potholes of further, poor political decision-making as they motor to their doom.
In all likelihood, however, our state-employed bus driver will avoid these two offshoots and will rather stick steadfastly to the busy highway along which we are currently speeding, a broad Road of Good Intentions along whose dreary verges we see an army of labourers sweating over the construction of an ever more ramshackle confusion of governmental props, buttresses, and scaffolding as they try manfully to shore up the crumbling Babel of bad debt and faltering businesses to be found there, at least beyond the next election date.
Read the full report.
By Sean Corrigan, on 10 September 09
 Lord Timon's Purse In Lord Timon’s Purse, Sean Corrigan explores the causes of the forty US banking failures of 2009 and sets out some of the basics of money and bank credit.
Despite the US seeing its fortieth banking failure of the calendar year – the greatest number in sixteen years ‐ financial markets are managing their usual feat of deluding themselves that a Goldilocks outcome is in prospect.
News articles abound in sighting of what, in the tiresome horticultural parlance, are invariably referred to as ‘green shoots’; a back up in bond yields is rationalized away as a ‘re‐normalization’ from crazily‐depressed levels (a view with which we actually have some sympathy); rising commodity prices are not to be feared, being merely the expression of an understandable eagerness to indulge in ‘recovery’ plays; slack labour markets and the widespread under‐utilization of capacity is seen to allow central banks to maintain their current accommodative stance for many months to come and – mindful of the ‘mistakes’ made in 1937 – when the unwinding process finally arrives, it will be well‐signalled and gentle.
So, ‘Out of the eater came forth meat; out of the strong came forth sweetness’ and out of banking weakness comes forth equity delight – or so the Street desperately hopes.
Away from the sales pitches and book‐talking, opinion is still, as ever, divided over the outlook for prices. The old war of words is being rehashed between those who see a long, gloomy stretch of near‐deflation as the outcome and those beginning to fret over a resurgence of inflation almost as soon as the real economy regains some traction.
Inevitably, this polemic has degenerated into yet another battle pitting Gold Bugs against New Dealers and Dollar Permabears vs. card‐carrying Keynesians – a Prosperian dialogue light on intellectual substance and generally lacking in insight.
Sean revisits some of the basics (emphasis mine):
On such observations as these [on bank lending and bond issuance] rests the case of those Deflationists who do at least possess sufficient sophistication not to regard a mere drop in the CPI index (and one highly influenced by the fall in over‐elevated energy prices, at that) as the Alpha and Omega of the argument. However, these sages then usually make at least one of two further mistakes in their analysis; viz., that they confound Money with Credit and that they then entirely neglect what is fast becoming the primary mechanism by which new money is being introduced to the economy.
In order to dispel the confusion, we must here digress to reprise a few basics.
ʹMoneyʹ‐ for now disregarding the question of its particular composition ‐ is above all the medium of exchange whose other commonly‐cited attributes as a unit of account and a store of value are decidedly derivative, emergent functions, the first of which is not strictly commensurate with current money itself – e.g., SDRs ‐ and the second of which is sadly more often an aspiration rather than a statement of fact.
In order to function as the medium of exchange, money must be widely and unequivocally accepted ‐ indeed, it must be THE most widely accepted ‐ substitute for the specific consumable goods we seek in a typical trade when we surrender a different batch of consumables to our counterparty but have no use for the goods which he, in turn, is offering for sale. The upshot of this is that money is itself a present good, that is, one instantly utilisable in the here and now.
Again, to emphasise the crucial point, money must be thought of as THE present good par excellence (not, incidentally, just a mere representation of such goods) the one for which there is always a ready market: to say otherwise is an existential denial that it is money at all. While this may have been easier to grasp when money actually took the form of a tangible good ‐ whether cowrie shells, cattle, or silver crowns ‐ it is no less the case today when it has largely been robbed of physical expression.
Money, then, is the medium in which we can make final settlement of any transaction, as is recognised by those étatiste legal tender laws which Leviathan wields to force free individuals to use the bastard versions to whose creation it reserves to itself the exclusive right of sanction and from whose creation it thereby intends mischievously to profit.
By contrast, ‘Credit’ is an assignation of the right of command over present goods to another, whether for a fixed or an indeterminate period. Entailed in this alienation is a sacrifice for which we seek recompense by charging a fee ‐ namely, interest.
[NB: contra the mainstream misconception, interest is not the price of money (that can only mean its reciprocal value expressed in the other goods for which it exchanges), but the price of the time which passes while we forego enjoyment of our property]
Read more here.
By Sean Corrigan, on 9 September 09
In the 1 September 2009 edition of Material Evidence, Sean Corrigan explains why the stock market is rising and why the appearance of prosperity will not last.
 Corrigan, Material Evidence … the CRB equal‐weight index has put in a six‐month burst only topped in half a century in the run‐up to 2008’s peak and during the severe dislocation of the first oil shock, while the DJ Industrials ‐ lagging by a couple of months – have just registered their best half year since 1933 itself.
Without stopping to rehearse the entire thesis (laid out most recently in the last two editions of Tangible Ideas, viz., ‘Lord Timon’s Purse’ – oriented towards money and credit ‐ and ‘Goodbye to All That’ – which dealt with their real‐side impact), this ‘bullishness’ may have imparted the impression that we have something of a schizophrenic mindset since, in all other respects, our outlook has been jaundiced, to say the least. To the contrary, the two are not at all incompatible, but, rather, interrelated, since what we have all along said would drive a rapid rebound in asset prices would be continued central bank laxity, supercharged by the monetization of soaring government deficits and magnified by the market’s utter misunderstanding of the nature of the ‘recovery’ this has engendered as the liquidity crisis of ‘Snowball Earth’ has partially thawed to a still glacial Little Ice Age of misallocated capital and sorely impaired balance sheets.
Thus we continue to try to look past the breathlessly‐reported headline ‘numbers’ (which, presumably, is somewhat fundamental to the very business of analysis) with the aim of trying to ascertain whether any genuine and abiding improvement of private business is in train or whether all we are seeing is the overspill of state‐led, monetary‐fiscal orgiastics which are therefore doomed to end in another debacle at some indeterminate – but hardly indefinitely postponable ‐ point in the future.
Update
See also:
Hopes for a flurry of company takeovers and growing belief in the strength of economic recovery on Wednesday propelled the FTSE 100 index through the 5,000 level for the first time in almost a year.
…
Graham Secker, equity strategist at Morgan Stanley, said that equities, helped by the improving economic outlook and continued support from the world’s central banks, were enjoying a “sweet spot” that would sustain the rally for now.
“Growth is picking up and the stimulus taps are still full on. That is a pretty good environment for stocks,” he said.
via FT.com / Markets / UK – Footsie pushes above 5,000 and our Why is the FTSE going up?
By Sean Corrigan, on 24 August 09
 Tangible Ideas By kind permission of Sean Corrigan, we reproduce his report Tangible Ideas – Goodbye to All That, in which he explains the end of an economic era.
Consider German revenues:
 German Revenues The sheer violence of this reversal of fortune – something akin to the sudden, mortal swoop of a melted‐wax Icarus after long hours of patiently spiralling heavenward on the thermals rising off the Cretan coast ‐ has perplexed everyone from Her Britannic Majesty and her hapless First Minister to the fallen idols of investment practice, like Bill Miller and Bruce Bent – yet while its pattern may be a complex tangle of circumstances, there are, in truth, only a few basic threads in the weave, all of them very familiar to those with an Austrian perspective on the case: fiat money, gross government interference with markets, and the avid, rent‐grubbing irresponsibility it fosters in everyone involved from the most prominent financial flesheater to the most pathetic, Forgotten Man structured‐product stuffee.
And malinvestment arising from the system of money:
 Malinvestment Defined The reason [the nature of modern money] has been so pernicious is that it has circumvented the very business of reserve management and so has turned what should be the semi‐automatic self‐equilibration of the classical specie‐flow mechanism into a positive feedback of ever wider current account gaps, ever more profound misallocation of capital, ever more inflation ‐ albeit one masked in terms of finished good prices, as we have already seen, by the supply side impact of shifting production to where labour is cheap and the local politburo is happy to connive with its buddies in the state‐owned enterprises to provide near‐costless finance, inexpensive land, export tax incentives, and even subsidised utilities to a producer who is therefore relatively indifferent to the price he has to pay for his commodity inputs (remember those relative price trends we discussed earlier).
In a fair system, based on a proper, hard currency, the country running a deficit settles up by losing the bullion on which its circulation is based: domestic credit then contracts, prices fall, activity shifts to import substitution, and competitiveness is hence restored – an adjustment quickened by the fact that equal and opposite changes are taking place in the surplus country. ‘The monetary sin of the West’, however (to employ another Rueffism), is that while the surplus country today uses its excess foreign exchange receipts to expand the stock of high-powered money at home and so triggers its own production‐lengthening cycle, it simultaneously loans those same receipts straight back to their creators, preserving their credit pyramid in turn and thus encouraging them to continue their gross overconsumption.
Adding to the dangers, the deficit nation central bank sees the low‐price imports and artificially stabilized exchange‐rate as helping achieve its monophthalmic goal of suppressing ‘inflation’ which – being typically mainstream in its analysis – it imagines to consist only of rises in its favourite (usually pared) consumer price index. It is thus perilously predisposed to running far too loose at the same time as its foreign counterpart is relaxing, all despite the obvious warning sign which the trade deficit itself constitutes, namely, that demand has already outstripped the potential for domestic output to meet it.
Inevitably, in the over‐financed, speculative milieu in which we live, the excess credit thus called into existence soon spills over into asset markets (whose inordinate rise does not at all figure in the wholly naïve policy settings being followed) and so begins that unstable spiral of financial convection which sees notional net worth increasing and effortlessly generating the fresh collateral which will form the basis for yet more asset price‐boosting loans in the next iteration. Tempted by the capacity to engineer illusory and prematurely capitalised ‘profits’ in such a conducive current, the ever more hubristic bankers – by now not so much on Cristal Roederer as on crystal meth (metaphorically speaking, of course) – soon allow their hired‐in, mathematical idiot savants to ferret out highly explosive ways to cheat shareholders and regulators of due disclosure and so arrange to heap a Pelion of non‐linearity upon an Ossa of over‐leverage and undercapitalization.
And on the role of credit in the crisis:
Perhaps the quickest and cleanest way to show this was indeed the case is to look at the behaviour of the BIS series for member‐country banking balance sheets over the relevant periods. Indeed, if we consider that inflation – i.e. excess money creation – is, these days, primarily an increase in (demand) liabilities at banks, it is instructive to look at the explosion in their size (here, strictly speaking, we have performed our calculations on the other side of the balance sheet for convenience, but the difference is not significant).
 BIS Bank Asset Inflation In the 3 ½ years to the March 2008 quarterly peak of $40 trillion, total banking claims grew virulently at a ~22% compound annual rate, achieving the fastest nominal doubling in a three‐decade data series. Though it took a while for consumer prices to respond, if you wanted inflation (properly defined), you certainly had it in spades going into the Crash!
And, concluding:
The market may have to suffer a nasty bout of disillusion before it reconciles itself to the fact that the halcyon days are long gone and that the clock is everywhere ticking toward a reckoning with the government debt market.
By Sean Corrigan, on 10 August 09
Sean Corrigan, Chief Investment Strategist at Diapason Commodities Management, has kindly agreed to the reproduction of his briefing “Material Evidence” by the Cobden Centre. In this, 9 July 2009, edition, Sean restates the his position on banks: that they should have to comply with basic, everyday property and contractual law.
 Material Evidence, Sean Corrigan As we have often expounded, the vicarious gangsters we call politicians – while only to glad to bask in the reflected glory (and to revel in the enhanced campaign contributions) during the Boom – have now turned into a whole bath‐house full of petty Marats in their vituperative attempt to harness understandable popular anger and disquiet at the evils inflicted upon the citizenry by the dysfunctional, modern, state‐directed financial system.
This we again face the prospect of ‘hearings’ (would ‘show trials’ be a more accurate description?) in Congress aimed at limiting access to the commodity futures markets to the politically‐favoured few. Here we can only pause briefly to re‐iterate our fervent belief that there would be no need for any new ʹregulationʹ to prevent so‐called ʹspeculative excessesʹ anywhere if banks simply had to comply with basic, everyday property and contractual law; if money were a hard, free market good and not a pliable construct of the State; and, perhaps if recourse to that other positivist legal fiction, the limited liability partnership or corporate entity, were denied to those with fiduciary responsibility for other peopleʹs affairs. It would be much more effective ‐ if politically inconceivable – to address the root cause of all our ills, rather than to visit economically‐illiterate prejudices on its symptoms. If we cut the shoals of ʹvampire squidʹ down to their proper size, we could abolish the CFTC, the FDIC, the OCC, the SEC and the rest of the New Deal alphabet soup altogether, rather than uselessly empowering yet another tool for arbitrary, legislative grandstanding.
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