Economics

The Economist discovers the Entrepreneur.

In its latest edition, in a piece entitled ‘Monetary policy: Tight, loose, irrelevant’, the ineffably dire Ekonomista considers the work of three members of the Sloan School of Management who conducted a study of the factors which – according to their rendering of the testimony of the 60-odd years of data which they analysed in their paper, “The behaviour of aggregate corporate investment” – have historically exerted the most influence on the propensity for American businesses to ‘invest’.

 

The article itself starts by deploying that unfailingly patronising, ‘it’s economics 101′ cliché by which we should really have long ago learned to expect some weary truism will soon be rehashed as fresh journalistic wisdom.

It may be only partly an exaggeration to say that the weekly then adopts a breathless, teen-hysterical approach to a set of results which, with all due respect to the worthies who compiled them, should have been instantly apparent to anyone devoting a moment’s thought to the issue (and if that’s too big a task for the average Ekonomista writer, perhaps they could pause to ask one of those grubby-sleeved artisans who actually RUNS a business what it is exactly that they get up to, down there at the coalface of international capitalism). Far from being a Statement of the Bleedin’ Obvious, our fearless expositors of the Fourth Estate instead seem to regard what appears to be a tediously positivist exercise in data mining as some combination of the elucidation of the nature of the genetic code and the first exposition of the uncertainty principle. This in itself is a telling indictment of the mindset at work.

For can you even imagine what it was that our trio of geniuses ‘discovered’? Only that firms tend to invest more eagerly if they are profitable and if those profits (or their prospect) are being suitably rewarded with a rising share price – i.e. if their actions are contributing to capital formation, realised or expected, and hence to the credible promise of a maintained, increased, lengthened or accelerated schedule of income flows – that latter condition being one which also means the firms concerned can issue equity on advantageous terms, where necessary, in the furtherance of their aims.

 

[As an aside, do you remember when we used to ISSUE equity for purposes other than as a panic measure to keep the business afloat after some megalomaniac CEO disaster of over-leverage or as part of a soak-the-patsies cash-out for the latest batch of serial shell-gamers and their start-up sponsors?]

 

Shock, horror! Our pioneering profs then go on to share the revelation that firms have even been known to invest WHEN INTEREST RATES ARE RISING; i.e., when the specific real rate facing each firm (rather than the fairly meaningless, economy-wide aggregate rate observable in the capital market with which it is here being conflated) is therefore NOT estimated to constitute any impediment to the future attainment (or preservation) of profit. Whatever happened to the central bank mantra of the ‘wealth effect’ and its dogma about ‘channels’ of monetary transmission? How could those boorish mechanicals in industry not know they are only to invest when their pecuniary paramounts signal they should, by lowering official interest rates or hoovering up oodles of government securities?

 

At this point we might stop to insist that the supercilious, wielders of the ‘Eco 101’ trope at the Ekonomista note that these firms’ own heightened appetite for a presumably finite pool of loanable funds should firmly be expected to nudge interest rates higher precisely in order to bring forth the necessary extra supply thereof, just as a similar shift in demand would do in any other well-functioning market (DOH!), so please could they take the time in future to ponder the workings of cause and effect before they dare to condescend to us.

 

They might also reflect upon the fact that when the banking system functions to supplement such hard-won funds with its own, purely ethereal emissions of unsaved credit – thereby keeping them too cheap for too long and so removing the intrinsically self-regulating and helpfully selective effect which their increasing scarcity would otherwise have had on proposedschemes of investment – they pervert, if not utterly vitiate, a most fundamental market process. Having a pronounced tendency to bring about a profound disco-ordination in the system to the point of precluding a holistic ordering of ends and means as well as of disrupting the timetable on which the one may be transformed into the other, we Austrians recognize this as theprimary cause of that needless and wasteful phenomenon which is the business cycle. It is therefore decidedly not a cause for perplexity that investment, quote: ‘…expands and contracts far more dramatically than the economy as a whole as the Ekonomista wonderingly remarks

 

Nigh on unbelievable as it may appear to the policy-obsessed, mainstream journos who reviewed the academics’ work, all of this further implies that the past two centuries-odd of absolutely unprecedented and near-universal material progress did NOT take place simply because the central banks and their precursors courageously and unswervingly spent the whole interval doing ‘whatever it took’ to progressively lower interest rates to (and in some cases, through) zero! Somewhere along the line, one supposes that the marvels of entrepreneurship must have intruded, as well as what Deidre McCloskey famously refers to as an upsurge in ‘bourgeois dignity’ – i.e., the ever greater social estimation which came to be accorded to such agents of wholesale advance. This truly must shake the pillars of the temple of the cult of top-down, macro-economic command of which the Ekonomista is the house journal.

 

Remarkably, the Ekonomista’s piece is also daringly heterodox in inferring that, given this highly singular insensitivity to market interest rates, we might therefore return more assuredly to the long-forsaken path of growth if Mario Draghi and his ilk were to treat themselves to a long, contemplative sojourn, taking the waters at one of Europe’s idyllic (German) spa townsinstead of constantly hogging the limelight by dreaming up (and occasionally implementing) ever more involved, Cunning Plans directed towards driving people to act in ways in which they would otherwise not choose to do, but in which Mario and Co. conceitedly deem that they should.

 

Rather, the hacks have the temerity to assert – and here, Keynes be spared! – it might do much more for the investment climate if the Big Government to which they so routinely and so obsequiously defer were to pause awhile in its unrelenting programme to destroy all private capital, to suppress all economic initiative, and to restrict the disposition of income to thecentralized mandates of its minions and not to trust them to the delocalized vagaries of the market – all crimes which it more readily may perpetrate under the camouflage provided by the central banks’ mindless and increasingly counter-productive, asset-bubble inflationism.

 

Having reached this pass, might we dare to push the deduction one step closer to its logical conclusion and suggest that the only reason we continue today to suffer a malaise which the self-exculpatory elite (of whom none is more representative than the staff of the Ekonomista itself) loves to refer to as ‘secular stagnation’ is because its own toxic brew of patent nostrums is making the unfortunate patient upon whom it inflicts them even more sick? That, pace Obama the Great, The One True Indispensable Chief of the NWO, the three principal threats we currently face are not Ebola, but QE-bola – a largely ineradicable pandemic of destruction far more virulent than even that dreadful fever; not the locally disruptive Islamic State but the globally detrimental Interventionist State – the perpetrator of a similarly backward and repressive ideology which the IMF imamate seeks to impose on us all; and definitely not the Kremlin’s alleged (though highly disputable) revanchism being played out on Europe’s ‘fringe’ but the Kafkaesque reality of stifling and undeniable regulationism at work throughout its length and breadth?

 

We might end by reminding the would-be wearer of the One Ring, as He lurks warily, watching the opinion polls from His lair in the White House, that in being so active in propagating each one of these genuinely existential threats to our common well-being, He (capitalization ironically intended) will not so much ‘help light the world’ – as He nauseatingly claimed in His purple-drenched, sophomore’s set-piece at the UN recently – as help extinguish what little light there still remains to us poor, downtrodden masses.

 

 

 

——————————————————————————————————-

 

 

The offending article:

 

http://www.economist.com/news/finance-and-economics/21625875-interest-rates-do-not-seem-affect-investment-economists-assume-tight-loose

 

 

Monetary policy

Tight, loose, irrelevant

 

Interest rates do not seem to affect investment as economists assume

 

 

 

IT IS Economics 101. If central bankers want to spur economic activity, they cut interest rates. If they want to dampen it, they raise them. The assumption is that, as it becomes cheaper or more expensive for businesses and households to borrow, they will adjust their spending accordingly. But for businesses in America, at least, a new study* suggests that the accepted wisdom on monetary policy is broadly (but not entirely) wrong.

 

Using data stretching back to 1952, the paper concludes that market interest rates, which central banks aim to influence when they set their policy rates, play some role in how much firms invest, but not much. Other factors—most notably how profitable a firm is and how well its shares do—are far more important (see chart). A government that wants to pep up the economy, says S.P. Kothari of the Sloan School of Management, one of the authors, would have more luck with other measures, such as lower taxes or less onerous regulation.

 

Establishing what drives business investment is difficult, not. These shifts were particularly manic in the late 1950s (both up and down), mid-1960s (up), and 2000s (down, up, then down again). Overall, investment has been in slight decline since the early 1980s.

 

Having sifted through decades of data, however, the authors conclude that neither volatility in the financial markets nor credit-default swaps, a measure of corporate credit risk that tends to influence the rates firms pay, has much impact. In fact, investment often rises when interest rates go up and volatility increases.

 

Investment grows most quickly, though, in response to a surge in profits and drops with bad news. These ups and downs suggest shifts in investment go too far and are often ill-timed. At any rate, they do little good: big cuts can substantially boost profits, but only briefly; big increases in investment slightly decrease profits.

 

Companies, Mr Kothari says, tend to dwell too much on recent experience when deciding how much to invest and too little on how changing circumstances may affect future returns. This is particularly true in difficult times. Appealing opportunities may exist, and they may be all the more attractive because of low interest rates. That should matter—but the data suggest it does not.

 

* “The behaviour of aggregate corporate investment”, S.P. Kothari, Jonathan Lewellen, Jerold Warner

 

Economics

Austrian economics in Shanghai

Extraordinary things are happening in China, as we know. On the liberty-loving front, we can report a really interesting and path-breaking conference organised by our friend Ken Schoolland:

The Shanghai Austrian Economic Summit

A milestone event this summer in China. Sponsored by the International Society for Individual Liberty, we have 20+ speakers, 8 from the Mont Pelerin Society, attendees from across Asia, Europe, and the US, and a post conference tour.

On a related note, Sean Corrigan informs us of another exciting development for Chinese liberalism:

Economics

Bandits with begging bowls

A recent CNBC article by Catherine Boyle has some classic quotes from Sean Corrigan:

The euro zone’s banks, seen by many as the source of the region’s debt crisis, will ultimately be bailed out by “vested interests,” Sean Corrigan, chief investment strategist, Diapason Commodities Management, said.

“There may be one or two forced to merge or to fall by the wayside, but all the vested interests will come back together,” he said. “We don’t allow for the market or competitive forces to come to their full severity, and when these guys act like bandits in the good times and come with begging bowls in the bad, we criticize capitalism.”

On the euro zone deal:

“They have averted a collapse this way, but they themselves don’t know what they have put in place,” Corrigan said of the EU leaders. “There’s this idea that it will conduct some little bit of magic, that these guys in the financial markets, who we hate, have been conducting and this will simply make Italy’s debt lower and Greece competitive. Yet nobody knows what the details are.”

On policy closer to home:

“Whether or not you believe the government should be setting banking policy rather than bankers, the issue is that the government didn’t take any executive control,” Corrigan said. “If that’s going to happen, there should be a clear program of forcibly putting the bank back in the hands of the market in a set time. I don’t see that happening in Britain.”

Sean of course had more to say that didn’t make it into the article, but even so, it’s great to see our message relayed in the mainstream press.

Economics

CNBC: Corrigan discusses EFSF increase

In his latest appearance on CNBC, Sean Corrigan discusses the EFSF increase and the upcoming stealth bailout of european banks.

Economics

The 10th Anniversary

A Modest Craft – Sept 12, 2001

It is at times like these that we in the financial sector are humbled in the presumption of our own importance and of the meaning of our works. Daily, we chase the ebb and flow of symbols and numbers across the screens and ticker tapes of the world, seeking to distill from them a fleeting pattern, or to recognize within them some more enduring form.

Rarely, if ever, amid the hubbub of the trading room or the raw intensity of the Pit, do we reflect on the power of such symbols. We crane for each flickering change in a terse alphanumeric—USZ1, DELL, CPI +0.2%, DAX +150—each of us striving uselessly, but compulsively, to see it before our peers do, or, with a little more purpose, to interpret it more quickly than they.

These electronic lights represent a stock, a bond, a currency; of that much we remain aware. But the stocks or bonds themselves are but symbols: a claim to the ownership of a minuscule fraction of some sprawling enterprise, or a right to receive payment from it in days to come.

Again, that payment—in dollars, or euros, or yen—is another symbol: a sign that men have “laboured the earth,” in Jefferson’s trenchant phrase, and that they seek to exchange the fruits of those labours for our own.

This is where the chain of ciphers and sigils leads us at last, then—to the efforts of ordinary men and women going about their daily lives, working at one thing, the thing at which they are most competent, in order to swap their efforts for other things, for a whole diversity of things, made, in turn, by countless, faceless others doing what they are good at, too.

By such free and open exchange, best conducted using fair and honest chains of symbols so that no man is unwittingly deluded or knowingly defrauded in the act, we each seek to serve our enlightened self-interest and satisfy both basic needs and wider aspirations. We find the opportunity where we are most rewarded, and we send out our labours into the vast, teeming, immaterial, immanent Market that is our world.

And—O Mirabile—what things come back, in what profusion, pouring in from all corners of the globe, from people we have never seen, whom we will never see, and who equally are oblivious to our very existence also.

This is the majesty of the free market, of capitalism, this self-organizing scheme that most fully utilizes our jewelled planet’s greatest resource—humanity itself—so that the masses of today live better than all the fearsome khans and haughty emperors of old.

But on Tuesday, out of a clear autumnal sky, all this was put at deadly hazard by earnest men, albeit men whose earnestness had been twisted into suicidal hatred by the potent brew of fanaticism and despair. By their intricate assault on the good people of the U.S., these men showed that they were versed in the power of symbols all too well.

To attack the Pentagon—a cabbalistic form, if ever there was one—was shocking enough, displaying what guerrilla fighters have shown from time immemorial: that all of Caesar’s legions cannot guard against the man who fears nothing but to fail, and who holds his life most gloriously spent in depriving his enemies of theirs.

But far more shocking yet was the strike deep into the very heart of trade, of commerce, and of finance that those few crammed canyons of soaring steel and glittering glass at the tip of Manhattan represented, not just to America, but to the entire world. This was not just an abomination: in many ways, it was a deliberate act of sacrilege.

In tens of minutes, before unbelieving eyes staring from the streets below or gazing in horrid fascination at TV screens across the globe, fireball billowed into smoke and then collapse: crushing, utter, complete and roaring collapse.

As though struck from where they stretched unto the very portals of some jealous god to choking dust and stumbling rubble, they fell in ruinous descent, and Hope itself seemed perished.

The Twin Towers, standing symbolically over Wall Street, were a 1,300-foot rendition of those two, short verticals that transform a mere “S” into a dollar, transmuting it to a symbol for work and wealth and well-being across the Earth.

The enormity of the towers’ swift destruction has been such as to suspend analysis. We have yet to truly register what has been done, how many lives have been lost in screaming (if mercifully brief) terror, how many countless other lives will bear the mark of what was wrought, shivering in the cold snatch of fear each time they see the suddenly naked skyline of New York.

It would be heartening to think that sober wisdom will now occasion restraint in the councils of the powerful, that the understandable desire for retribution, for lex talionis, to be invoked neither will lead to rash and unjust acts that only serve to excite more hatred, nor open up the way for the ever-eager State to intrude more insidiously in people’s lives at home, while snarling ever more belligerently at foes—real or imagined—abroad.

It would be heartening to believe that in America of all nations, the brash, young, self-confidence of its people will swiftly reassert itself, that temperance will season justice, and that this brief, vicarious brush with mortality will give rise to a more measured outlook on life.

It would be heartening to think that, having been shocked by just how fragile is the framework on which we build our dreams, we will become less prone to forcing them upon others. Our fear must be that, in a world already made fractious and divided by the inexorable, UN-inspired, left-liberal-sanctioned politicizing of race and creed and gender, a world made insecure by the erosion of freedom and the imposition of alien values by the Guardians of our global Platonic republic, yet more discord is sown.

We must also fear that, in a world made resentful by seeing the fruits of its labours channelled to vainglorious corporate demi-gods who strut the stage like Achilles simply because a hyperactive credit system has grossly inflated their stock price, Capitalism is made to take the blame.

Capitalism is about the better production of wealth and its distribution through unrestricted exchange. It is about the multiplication of output that comes about by the division of labour. It is about the preservation of capital—those mental and physical tools that build each successive flight on our long stairway out of penury and deprivation—and it achieves that preservation only by the common virtue of thrift and the duty of stewardship on one hand, and by the banishment of envy and the sanctity of property upon the other.

Capitalism is about “labouring the earth” more fruitfully so that fewer men go needy, so that the next fanatic finds less willing recruits, so that amid bustling commercial intercourse, barriers of class and race and ignorance are dissolved into mutual respect and benefit.

Capitalism is nothing to do with the agents of the Crown who sail alongside the honest argosies of trade. Capitalism is nothing to do, either, with the forced acceptance of any creed or code of law, save that of the honest self-interest by which both buyer and seller achieve an increment of value in their exchange.

For we must realize that Capitalism, this most certain route to prosperity devised by man, is also the victim of the exactions of the State and the depredations of the credit system. Why else, even before yesterday’s barbaric deeds, were we increasingly in peril of our livelihoods, our investments, and our savings?

Sadly, that is a verity too rarely glimpsed when the battle ensigns of the fleet and the Jolly Rogers of the corsairs are concealed amid the merry, ingenuous bunting of the mass of ordinary merchantmen seeking innocently to ply their trade.

From this passing meditation on these matters, which this week’s dark happenings have prompted, we shall soon return to the business of chasing symbols and trying to make sense of them. That is, after all, our modest craft in the rich whirl of the market.

For today, we pray for the maimed and the bereaved. We are anxious for the path of the economy and our immediate prosperity. We fret that liberty will once again be the most enduring loser.

In memoriam,

Sean Corrigan

Chief Investment Strategist

Diapason Commodities Management S.A.

Press

Sean Corrigan on CNBC

Sean Corrigan is a good friend of TCC. Yesterday, he appeared on CNBC where he provided a masterful overview of current events on the markets. You can see him in action here.

Economics

The privileged few have eaten everybody else’s lunch

Another great interview with Sean Corrigan on CNBC

Airtime: Mon. Jul. 18 2011 | 7:00 AM ET

Big US banks should have been allowed to fail, Sean Corrigan, chief investment strategist at Diapason Commodities Management, told CNBC Monday. “The privileged few clustering around the Treasury Secretary and the Fed have eaten everybody else’s lunch,” he said.

Economics

CNBC: China Reflects ‘Vampire Economy’

Sean Corrigan’s latest appearance on CNBC is well worth watching (3m 42s).

Mon 27 Jun 11 | 02:00 AM ET

The Chinese economy reflects the ‘Vampire Economy’ of Germany in the 1930s where the state controlled prices at the expense of profit, Sean Corrigan, chief investment strategist at Diapason Commodities Management told CNBC Monday. He added Chinese inflation figures were “not realistic of the stress in the system.”

Economics

CNBC: China to Hike Rates Again Soon?

My latest CNBC interview:

The Chinese will have to “come back to the party again pretty soon” and raise interest rates in the face of rising prices, Sean Corrigan, chief investment strategist at Diapason Commodities Management told CNBC Monday. He said Chinese money supply has been decelerating, but not as rapidly as authorities may have anticipated.

Economics

Ben Bernanke’s Latest Bubble

Ever since Chairman Bernanke’s infamous Jackson Hole speech in August, markets – previously beginning to wilt under the weight of relatively poor economic numbers – have been on a tear. Greatly reinforced by the decision taken at the next FOMC meeting to buy US Treasuries as the Fed MBS portfolio ran off, the period since has been a veritable wet dream for such a committed inflationist as Blackhawk Ben. Assets prices have soared and the dollar has crumbled, dropping more than 6% on its TWI, taking it to within a percent of its modern-era lows.

One still wonders whether the academicians who populate the world’s most important monetary council fully understood the feedback loop that seemingly technical decision to buy Treasuries would spark by lowering yields to the point that more mortgages would repay, generating a need to hedge convexity and replace duration by MBS holders everywhere, as well as driving more Fed purchases and so on round and round.

Fig 1: MBA Refinance Index (orange) v FNMA 15yrs (2005-td)

With around 80% of all mortgage applications currently taking the form of refinancings, the instability introduced here must be evident to all.

One must also look askance at the sheer intemperance of the Chairman’s words – backed up on several occasions by other senior figures, just in case we had not received the message – in an environment where market participants, already drunk on the heady liquor of near-zero interest rates, were begging for a profit-making, year-end boost to prices and so very ready to jump on the first momentum bandwagon to come their way.

It also remains unclear to what extent the Fed realizes that while all this loose talk may have seemed a costless way to jawbone some brighter ‘animal spirits’, it has also delivered an enormous hostage to fortune. Such has been the violence – and near unanimity – of the action that the FOMC can hardly now risk NOT setting off some pretty spectacular fireworks at its November meeting (something we are not quite sure if the few remaining voices of sanity – Messrs. Plosser, Lacker, Fisher, and Hoenig – fully comprehend either).

Moreover, even if the panel does light the blue touch-paper and retire, the need to overtop sky-high market expectations means it still risks setting off a damp squib and defeating its own aims.

Meanwhile, the US monetary crank-in-residence at Threadneedle St. – Adam Posen – is off singing a tune for which the increasingly unanchored coalition government is handing out the hymn sheets: more monetary ease should be delivered to soften the blow of a looming fiscal restriction which already resounds to the squeak-squeak of a bicycle beginning to be pushed backward.

A measure of this man’s understanding is that he appears to have told the German press that the best solution to their country’s problems is that they should immediately add to the expense of employing anyone there by raising wages. Reducing competitiveness and throwing people out of work in this manner would be of ‘help’ internationally, he argued.  Is the ruination of one country at a time not enough for this man – yet another Harvard-educated, career servant of the state who does not appear ever to have made an honest living satisfying private customers’ needs in a competitive marketplace?

In the intervening seven weeks or so, since Ben opened Pandora’s Box, the dominance of this new, inflationary bent to policy has seen the previous belief system of Risk ON (buy ozzie, sell yen; buy euro, sell dollars: buy bonds, sell stocks; buy industrials in preference to gold) and Risk OFF (do the opposite) repudiated in favour of simply buying everything with gay abandon in order to get out of the dollar and – to a slightly less avid extent – out of sterling, too.

Thus, the dollar has begun to follow US real yields as they plumb new lows – with TIPS as far out as mid’17 now below zero after a 70bp drop. For its part, the S&P has come into tight phaselock with break-even inflation rates. So close has this latter relationship become over the past two quarters that the levels have an r2 of 0.83 and the daily percentage changes one of 0.43.

Fig 2: US Trade-weighted index (orange) v UST 5-yr index-linked, last 12m

Fig 3: TWI-adjusted S&P500 (orange) v US Break-even inflation rate (Mar’10-td)

As for those BEIs themselves, they have moved appreciably higher, gaining 40bps at the front of the curve and around 65bps five years out, surpassing those in Europe for the first time since May and moving the two to their largest differential since before the crisis broke open in 2008.

Fig 4: UST 5-yr zero coupon rates: spot (black) and 10-years forward – post-LEH

Nominal yields have also diverged smartly across the maturity spectrum, with 5-year zeros shedding 27bps to reach an inordinately low 1.07% while their equivalent bucket, ten years further up the curve, have added 75bps, pushing the spread between them to seven year highs and the ratio off the chart.

Fig 5: Junk (orange) and EMBI spreads – last 12m

As for ‘risk’, the ITRAX Crossover index lost a quarter of its 200bps starting point before recouping some of the loss; VIX levels declined almost 40% to stand a mere 250bps above their post-Crisis lows; junk spreads have fallen 85bps, and EMBI’s 50bps. EM equities have finally regained their pre-Tequila highs v MSCI World ones.

All this has not only meant that the Value Line index has climbed 18.5% – with small caps outperforming mid and mid, large – but that the NASDAQ 100 has surged to its best since Xmas 2007 – reaching its highest v the S&P since the Tech Bubble burst. The furore has also been enough to push commodities up 17.5% with the four main sub-sectors (base & precious metals, energy, and agri) all participating with similar levels of gusto.

Fig 6: MSCI EM v World – 1991-td

It has also seen renewed, breathless coverage of junk bond markets in the press – just like Michael Milken days, according to one recent story. Highly-leveraged, private equity buy-outs are also making the headlines; hedge funds are again attracting big money; while the stampede to chase the emerging market bandwagon has already led to more inflows in calendar 2010 than in any previous full-year period, adding greatly to distortions and, hence, dangers there, too.

In short, every single one of these developments demonstrates that Mr. Bernanke’s campaign against deflation has been succeeding only too well of late, with consequences to come at which we can only shudder for, when this next bubble bursts, it will all too probably collapse what little reconstruction work has taken place atop the rubble of the previous one.

Material Evidence 15th October