John Butler

IN THIS EDITION the keynesians’ new clothes Since early 2010 I have been arguing in these pages against the core neo-Keynesian precepts of the economic and monetary policy mainstream. In general I have not been optimistic that, notwithstanding their abject failure to foresee the global financial crisis, and their ongoing, failed responses thereto, the mainstream would reconsider its views. But some interesting developments on multiple fronts indicate that they are doing just that. So does this represent the beginning of the end of the flawed neo-Keynesian policies that treat debt rather than savings as real wealth; consumption rather than investment as sustainable growth; and money as something to be manipulated to ‘manage’ the economy? Sadly, no. While they may realise that their policies are failing, what they are now contemplating is an even more radical programme of outright debt monetisation, wealth confiscation and vastly expanded central planning. Investors must take appropriate actions to protect themselves now, before such policies are implemented. A BRIEF WORD ON THE US ELECTIONS Naturally there is all manner of comment out there at present about the investment implications of the US elections. My thoughts have already been expressed in previous Amphora Reports. I will reprint
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IN THIS EDITION A TWEET TOO FAR? Former General Electric Company (NYSE:GE) CEO Jack Welch recently ignited a firestorm over his ‘tweet’ that the US September labour market data appeared to have been manipulated for political reasons. Indeed, there were some curiosities in that particular report, but they hardly end there. The fact is, much official US data are misleading in some way, if not manipulated. Don’t believe me? Well, rather than label me a ‘conspiracy theorist’, why don’t you take a look at the evidence? What you see might surprise you. THE USE, MISUSE AND ABUSE OF STATISTICS “Unbelievable jobs numbers…these Chicago guys will do anything…can’t debate so change numbers.” So read the ‘tweet’ that the media immediately labeled a ‘conspiracy theory’, leading in short order to former General Electric Company (NYSE:GE) CEO Jack Welch’s resignation as business correspondent from Reuters News.       Publicily accusing the US president or his advisors of deliberately fudging economic data for political purposes is a serious act, one certain to draw a response from the media. But as is so often the case, the response this time was primarily to remark at how outrageous the claim supposedly was, rather than to examine the evidence
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IN THIS EDITION A VICIOUS CYCLE Economic data the world over indicate that a global economic slowdown is well underway. Central banks have already responded with fresh stimulus, as anticipated by financial markets. But just as the economic recovery of 2009-2011 was largely artificial and, thus, disappointing in key respects, so the unfolding slowdown is going to result in a few nasty surprises. In this Amphora Report I discuss what I believe to be some of the more important implications of the current, ‘vicious’ cycle, in which unseen damage is being done to the global economy. As the damage becomes apparent—perhaps already this year—equity market valuations are going to take a hit. NOT YOUR PARENTS’ BUSINESS CYCLE For some months now, leading indicators the world over have been pointing toward slower growth ahead. It’s not just about the euro-area any more. China, India, Brazil, the US, Japan—most economies appear to be slowing. A major recession may not be on the way but below-trend growth has already arrived and looks set to continue into 2013. Business cycles being a fact of economic life, the current slowdown is not surprising in of itself. No, what is surprising is the upturn that preceded
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IN THIS EDITION PAR FOR THE PATHOLOGICAL COURSE Economic policymakers are like children in that they are held only partially accountable for their mistakes and misdeeds. And just as children learn to selectively deny responsibility to get away with naughty behaviour, so policymakers learn that they, too, can conveniently disown the ‘unintended consequences’ of their actions. It is thus refreshing to see that a recent paper by the NY Fed explores some possible unintended consequences of negative interest rates—an extreme, unconventional monetary policy action under discussion by central bankers. Yes, central bankers apparently will stop at nothing to artificially stimulate what they call ‘growth’, which in recent years has resulted in money and debt growth rather than real, sustainable economic activity. Among other things, this money and debt growth has propelled the price of gold higher. But how high is it really? Let’s take a closer look: It’s not as high as you might think. THE PATHOLOGY OF CENTRAL BANKERS In an Amphora Report published in 2010 I posed the then-provocative question, “Has the Fed become pathological?” Well, time moves on, another iteration of quantitative easing (QE) is announced—apparently an ‘open-ended’ one this time—and I suppose we have now reached
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  IN THIS EDITION CAUGHT IN A DEBT TRAP As with much of the euro area, the US is in a debt trap. All the politicking in DC does not change this economic fact. The federal debt is going to be devalued. Yet even now, amid a new economic slowdown, US consumer price inflation is set to remain positive following a large spike in global food prices. Few things damage economic confidence more than food price inflation. Combined with the escalating financial crises in the euro area and also now in US municipals, the global slowdown already underway is likely to accelerate, leading to a further deterioration of sovereign finances. The debt trap is deepening, with ominous consequences for monetary and price inflation. The dollar and most currencies remain severely overvalued; gold and most commodities, undervalued. GUESS WHAT’S COMING TO DINNER (AGAIN)? In October 2010, I wrote in the Amphora Report titled Guess What’s Coming to Dinner: Inflation! that sharply higher agricultural commodity prices were going to contribute to a rise in consumer prices in the coming months. Sure enough, there was a material rise in the US CPI and that of many other countries in the final months of
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BREAKING NEWS: REGULATORS TO CLASSIFY GOLD AS ZERO-RISK ASSET In what might be the most underreported financial story of the year, US banking regulators recently circulated a memorandum for comment, including proposed adjustments to current regulatory capital risk-weightings for various assets. For the first time, unencumbered gold bullion is to be classified as zero risk, in line with dollar cash, US Treasuries and other explicitly government-guaranteed assets. If implemented, this will be an important step in the re-monetisation of gold and, other factors equal, should be strongly supportive of the gold price, both outright and relative to that for government bonds, the primary beneficiaries of the most recent flight to safety. Stay tuned. DID ANYONE NOTICE? In an Amphora Report last month, The Canary in the Gold Mine, I made the case that a key reason why gold has not been acting like a safe-haven asset in recent months is because banks are so capital impaired that they are scrambling to reduce their holdings of risky assets in favour of so-called ‘zero-risk-weighted’ assets, against which they needn’t set aside any regulatory capital. As it stands, gold has a 50% risk-weighting. But some government bonds, including US Treasuries, German Bunds and
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  FROM DEFLATION PUSH……TO INFLATION SHOVE For the third time since 2008, financial markets are pricing in a deflationary rather than inflationary future. The reasons for this are understandable. There is now strong evidence that global economic activity is slowing. The euro-area banking and sovereign debt crisis is worsening. The US is heading towards a so-called ‘fiscal cliff’ in 2013, implying a recession. And all this is occurring without global GDP having surpassed its pre-2008 peak. Notwithstanding multiple rounds of massive, Keynesian-inspired, theoretically inflationary stimulus, deflationary pressures are building anew. Does this imply that we face a deflationary future? To answer that question, we must study carefully what happened in 2008-09. When the deflationary push came, policymakers responded with an even larger unconventional inflationary shove. Deflationists beware: There is clear evidence that, under an elastic, fiat currency regime, the deflation endgame is, paradoxically, inflationary. DEFINING TERMS Economists have a word for recessions that occur prior to a previous GDP peak: A depression. Yes, when the normal economic growth and business cycle course of events fails to materialise, with each peak in activity surpassing the former, you are no longer in recession, however severe. You are in a depression. Well, now
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IN THIS EDITION WHY BANKRUPTCY IS THE NEW BLACK OK, OK, I’m not exactly one to write about fashion, but fashion is about trends, and investment analysis is frequently about identifying trends early, if possible even before they properly begin, to assume the vanguard position prior to a dramatic outperformance of a given asset, or investment style. And so, in exercise of my modest accumulated wisdom and experience, I am predicting a surge in US corporate restructurings and bankruptcies, if not already in 2012, then in 2013. There is just too much corporate capital being wasted and consumed on bloated, inefficient balance sheets. Investors, normally fearful of bankruptcy, will soon learn that it is, in fact, their best friend. Once a corporation is on the edge, the sooner you push it over, the better. Free up that capital, re-deploy it, run it lean and mean and, when the time is right, leverage it up and score the big returns. How best to invest for a world in which bankruptcy makes the front page of Vogue? Read on. CAPITALISM DEFINED Truth may be the first casualty of war but semantics is the first weapon of debate. As Sun Tzu observed, to
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    Already on the defensive due to a persistent failure to achieve its stated policy aims, the US Fed was subject to much fresh criticism over the past week, including from the BRIC nations, collectively the largest foreign holders of US dollar reserves. While the dollar remains the world’s pre-eminent reserve currency, there is growing recognition everywhere, except inside the Fed itself, that a choice will soon have to be made: Either the Fed must move to implement a credible, rules-based monetary policy, focused primarily on preserving the purchasing power of the dollar, or the dollar will lose reserve currency status, initiating a vicious spiral of dollar and US Treasury market weakness, which would quickly spill over into the financial system generally. Were that to happen, the current debate about how to reduce the US budget deficit would be promptly settled, as it would become impossible for the US to finance public sector deficits in the first place. Does the Fed, or the government, see the danger? Regardless, investors need not only to see it, but to understand it and to act accordingly. Time may be shorter than I previously thought. PROFESSOR TAYLOR CHANNELS FRIEDMAN Few US monetary economists
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