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viernes, 5 de junio de 2015

A global day of reckoning awaits: Interview with Mish Shedlock

Mike "Mish" Shedlock
The Global Financial Intelligence blog is pleased to present this interview with Mike “Mish” Shedlock. Mish is a registered investment advisor representative for SitkaPacific Capital Management and he posts on his Global Economic Trend Analysis blog on a daily basis.

We are sure our readers will enjoy his answers.

(Guillermo Barba, GB) Mish, you are one of the top financial bloggers in the World, you offer always a different point of view from the mainstream media. Please, tell us about the US economy. Is it in good shape or on the verge of a new recession?

(Mish Shedlock, MS) US GDP contracted at a 0.7% annualized in the first quarter. For discussion, please see First Quarter GDP -0.7%; GDPNow Second Quarter Forecast +0.8%; Economists Get Zero Accolades; Smoothed Recession Odds.  I was one of very few who outlined that possibility early, back in January in fact. See Diving Into the GDP Report - Some Ominous Trends.

The Atlanta Fed GDPNow Model now suggests 1.1% annualized growth. Should consumer spending  falter, and I believe spending will falter, the GDPNow forecast will be on the high side. Even if the GDPNow model is accurate, we are talking first half GDP of 0.3% or so, well below the stall speed.

On June 4th we learned Nonfarm Productivity Collapsed Greater Than Expected 3.1%, Unit Labor Costs Rose 6.7%. That is not good for hiring prospects.

Economists say this is transitory, but they have been saying that for nine months!

(GB) China, the Euro Zone, Japan and now the US seem to be in financial and economic trouble. What can we expect for the global economy? What will be the consequences for emerging markets like Mexico?

(MS) The global economy is clearly slowing led by Asia and the US. Europe has seen some improvement recently, but it’s based on the beggar-thy-neighbor tactics of QE. For a while, nearly a third of European government bonds traded with negative yields. This is outright lunacy in any market, and even more so if one buys into the recovery thesis.

No structural problems have been fixed in Europe or elsewhere. A global day of reckoning awaits; I just cannot say when.

Emerging markets in general have been hammered. Brazil is in a huge recession now, no one believes GDP stats from China, and commodity producers like Australia and Russia are in the dumps. Of those, I expect Russia to do best, because sanctions have forced Putin to make many necessary reforms.

One positive aspect for Mexico is the in-sourcing and near-sourcing trend in US manufacturing, from China. However, even if manufacturing returns to the North American continent, the jobs will not come with it thanks to robotics.

(GB) There is speculation that the Fed will raise interest rates sometime this year. What will happen if that occurs? What if it doesn’t?

(MS) The Fed seems hell bent on raising rates.  The Fed actually should because the Fed (central banks in general) has created enormous bubbles in equities and corporate bonds, especially junk bonds.

Things are now so distorted, it may not matter what the Fed does. Bubbles are 100% guaranteed to pop, by definition. And it is 100% obvious there are bubbles. The Fed cannot see them though, just as it failed to see the housing bubble in 2006 and the dotcom bubble in 2000.

The moral of the story is central banks create huge bubbles in a foolish attempt to defeat ordinary consumer price deflation that is not even damaging. The result is asset bubbles that are damaging when they pop. Even the Bank of International Settlement (BIS) recognizes routine deflation is not harmful, yet central banks fight it, creating massive asset bubble problems for their efforts.

For discussion of the nonsensical perils of CPI deflation, please see Historical Perspective on CPI Deflations: How Damaging are They?

(GB) Tell us your thoughts on Keynesians and Monetarists. Are their ideas and theories responsible for the current economic mess? If so, Why?

(MS) Keynesians believe governments need to step in with fiscal policy if growth is insufficient. Monetarists believe increasing the money supply if growth is insufficient. Neither group has any clue as to what “insufficient growth” means.

Both groups tend to believe routine deflation need to be fought. I addressed the foolishness of that belief above. 

Perhaps a simple example will help: If the Fed were to announce tomorrow that it would set the price of orange juice, everyone would be shocked. People would liken it to Soviet-style central planning stupidity, and they would be correct.

Yet, the Fed tries to do something much harder: set the supply of money and interest rates in a vain belief they can steer the economy.  

The results speak for themselves. After decades of deflation-fighting via both Keynesian and Monetarist policies, all Japan has to show for it is a debt-to-GDP ratio of about 250%, the highest in the industrial world.

All the rest of the world has seen from Keynesian and Monetarist foolishness is asset bubble after asset bubble with increasing amplitude over time coupled with central bank sponsored income inequality.

The economy is not something that one can drive like a tractor. It does not need steering. Left alone, the economy would do quite fine. Central banks are the problem, not the solution.

(GB) Central banks try to fight deflation by “printing” money and lowering interest rates. Some economists have warned that eventually this will create hyperinflation. Nevertheless, you have stated that you expect another round of credit and asset deflation. Why is that? What’s your definition of deflation?

(MS) I define deflation as a decrease in money supply and credit, with credit marked to market. Others define it in terms of consumer prices, and still others believe it’s simply an increase in money supply.

Those focusing on consumer prices, like the Fed, miss asset inflation. And as I stated earlier, it is asset deflation that wrecks the economy and banks, not routine CPI deflation. Asset deflation hurts because banks inevitably make loans based on inflated assets, and when the bubbles pop, banks are capital impaired and cannot lend, while borrowers immediately become overleveraged.

This is why those who ignore credit miss the picture as well. Since it’s clear that bubbles pop, and since it’s equally clear there are numerous asset bubbles, it follows there is yet another round of credit and asset deflation.

(GB) What can investors do to protect themselves from asset deflation?

·        - Avoid speculating in credit bubbles
·         -Avoid Leverage
·         -Pay down debts
·         -Have a cash cushion
·         -Be as liquid as possible
·         -Have at least a year’s worth of living expenses in cash in case you lose your job
·         -Put 20% or so of your assets in gold as a financial hedge

(GB) Do you think that free markets with the minimum number of regulations and laws to preserve property rights are the way to go?

(MS) Yes, as stated in many ways above.

(GB) That said, how do you respond to those who blame “free markets” for our problems? Do we have free markets in the world?

(MS) It’s rather curious that people blame the free markets when we don’t have them.  Every major problem blamed on the free market is caused precisely because we do not have them. Take the housing bubble: The Fed helped create the dotcom bubble with loose money supply in a foolish scare over Y2K (year 2000 date issues). When the dotcom bubble burst, the Fed kept interest rates too low, too long, sponsoring the housing bubble. US Congress passed legislation after legislation to make housing “more affordable”. President Bush added to the madness with the Ownership Society thesis. Fannie Mae, created out of foolish legislation added to the problem, and of course credit rating agencies rated pure garbage as AAA.

Mainstream media used every one of those policy errors to clamor for more regulation.

In actuality, there should not have been Fannie Mae, there should not have been an ownership society, there should not have been a Fed able to hold interest rates too low for too long, there should not be an FHA, there should not be a myriad of affordable housing programs, and the SEC never should have sponsored the rating agencies that in turn rated junk as AAA.

That latter point is particularly important.  To understand how the SEC helped sponsor the housing bubble, please see my May 18, article, Rate Shopping Whores and Chicago's Bond Rating, something I first wrote about in 2007, before the crisis even hit.

We do not have a problem because of a failure to regulate; we have “failure by regulation”.

(GB) In your opinion, should the monetary system come back to the gold standard?

(MS) Yes, the world needs a gold standard enforcement mechanism. Debt has spiraled out of control ever since Nixon closed the gold window. Once that happened, central banks and legislative bodies were free to inflate at will.  Once again, the results speak for themselves.  

Mexico’s Hugo Salinas Price is well out in front on this issue. He wants to bring “honest money” back to Mexico.  In December of 2014, Hugo penned A Silver Coin that is Money To Calm the National Tantrum in Mexico.

It’s an idea well worth considering.

(GB) Anything else you wish to add.

(MS) Money, interest rates, and the pitfalls of regulation are not easy subjects to discuss. I try to do so in a manner that most can follow. I hope I succeeded. Many thanks for the opportunity to try.

(GB) Mish, thanks for this interview.

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