The Tragedy of Linear Thinking at the Fed

September 12th, 2016 17:39 Central Time by Tom Bergerson

Recently some commentators (Blu Putnam at CME and Mike Shedlock at Mish) have started using a couple of words I have been thinking for a long time with respect to our economic overlords at the Fed. Those two words are linear thinking. I am surprised that for such supposedly smart people – I mean they have all the right credentials – their thinking seems to lack any depth. With masses of PhDs at their disposal they must be aware of what they are doing right?

In normal times, when credit availability and its price can act as a constraint on economic behavior, the classical Central Bank thinking is that lowering rates can spur economic activity. It works in a couple of ways.  Business people who are evaluating potential returns on business investment use a discount rate to deflate future cash flows to a value today. When that rate is lower, future cash flows are worth more in today’s dollars. If the discount rate is 0% then future dollars are worth the same as dollars today. And if rates were negative, then future dollars would be worth MORE than dollars today. That is of course the core of the concept of the time value of money, something we will have more to discuss later. Secondly, rates serve as a benchmark against which to measure that return. For example, if an investment is expected to return only 5%, then why go to the hassle of building a business if you can obtain 5% by simply buying a 5 or 10 year treasury note, whatever the case may be.

From this logic, our well educated monetary mandarins have smartly deduced a rule – lowering rates increases business activity. But central banking is an inexact science.  No one can know at any given time what the right rate is to spur activity in a dynamic and large economy with lots of international trade links such as ours.  So if lowering rates some does not work to increase activity, as the case now seems to be, then perhaps lowering them more will.  But therein lies the rub.  At some point (which was mostly theoretical prior to the dawn of this century), you approach 0%.  Free money.  The so called Zero Lower Bound.  Why is it a lower bound?  Because in every book, tract, treatise and bedtime story from the dawn of man until now, the concept of the time value of money was presumed to mean that a unit of value now is obviously and always worth more than one at some future time.  This flows from the fact that the future is uncertain and also that the moral fabric of western civilization (and probably most others) is woven with the thread of the concept of delayed gratification and the idea of saving.  It also flows from the last century’s increasingly frequent experience with inflation, especially after we went to a fiat monetary system.

But what if there were persistent deflation?  Well then money in the future would be worth more than money now.  It flies in the face of all that is holy.  It also creates an incentive to hoard money, to put it in the so-called mattress, which of course only makes the situation worse; the old deflationary spiral ensues.  So now some bold economists, dark robed academicians all, are starting to try on the idea that maybe the zero lower bound is not a barrier after all.  That is what the academy is good for after all, trying on outrageous ideas that fly in the face of conventional thought.  Like the argument about the existence of the number zero, there is a fight brewing.  Hopefully it will not result in the death, dismemberment or excommunication of anyone from the economic priesthood.

Several European countries and the ECB as well as the Bank of Japan have put negative rates in place.  They have also bought so many of the sovereign and now corporate bonds in the secondary market (wink, wink) that more than $13 Trillion worth of bonds trade at negative rates (or did until last week).  Of course, by buying up so much debt the Central Banks have apparently unwittingly reduced liquidity in the system because all that debt acts as collateral in the money dealing systems of the world.  (Try Googling Repo Fails or just go here.)  Nevertheless, in remarks after the Jackson Hole Fed Confab recently the Vice Chair of the Fed suggested that the negative rate experience was fruitful and positive for them.  I wonder.  (Fischer said “…Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.” Umm yeah, except trade-offs in economic outcome are supposed to be made by ELECTED officials Mr. Fischer. Were you elected?)

If I could have a friendly argument with Stan Fisher, I would argue that the zero bound and negative rates are qualitatively different from an ordinary positive rate regime and that the movement down from some positive rate to a lower rate is not the same as a move to zero or below. And the cloistered econometricians at the Fed and elsewhere must be aware of the ramifications or we are not getting our taxpayer’s money worth.

As Bill Gross has said, negative rates turn assets into liabilities.  Except that is not strictly true.  First, again, if inflation is negative then if negative rates on a debt instrument are less negative than inflation a person still comes out ahead in terms of future purchasing power.  Real rates (nominal rate minus the rate of inflation, which means if inflation is negative you ADD the second number to the first, moving to the right on the number line) are still positive.  And this is what the economists at the Fed are getting at.  In order to provide the amount of monetary accommodation they have in past crises, they would need to be able to drop rates 300-500 basis points. Well if they did that from the current level of 35-50 basis points where fed funds and IOER are now, that would mean rates in the neighborhood of -3 or -4%. Now like Y2K, nobody knows what that would do to the world.  At which point in the conversation it is appropriate to just make a list of who gains and who loses from such an outcome.

First off to lose are savers and retirees.  Having saved money for retirement, getting no interest to live on means they will be living on their capital.  Unless there is actual deflation, they risk running out of money before they die or at the very least seeing their standard of living be lower than anticipated.  Savers in such a system of financial repression (Like in Monty Python’s autonomous collective scene in The Holy Grail “Help, help I’m being repressed. Come and see the repression inherent in the system!”) will have less income to spend and this will reduce their aggregate demand for goods and services. Surely the Fed is aware of this but has concluded that the spur lower rates give to business investment more than offsets the loss? Which might be true if the availability of cheap credit were truly a constraint. But in the current crisis, it is likely that the elevated levels of debt already in existence at all levels (corporate, government and household) as well as poor demographics are more important. Also likely more important is the smothering presence of governance in all spheres of economic activity.

Neal Kashkari talked about the demographic challenge recently and Yellen has briefly nodded to it in post meeting questioning or congressional testimony briefly on a couple of occasions. It may be that they are unwilling to feature these issues in public discussion as they are intractable, do not lend themselves to monetary solutions and might inspire panic or at the least spoil the narrative of their political masters.  It is always better to face problems than pretend they do not exist and kick the can down the road, but in our political systems kicking the can is what you get.

Another dynamic with respect to savers, as featured in comments by people like Jeff Gundlach and others, is that by depriving savers of interest income, you actually make the job of saving harder, so rather than going without, prudent savers must conclude they must save MORE, further depressing consumption and aggregate demand.  But again the Fed must have figured this into their swollen antiquated econometric models right?

Second in the list of losers are pension funds and insurance companies. These entities have baked certain assumptions about returns into their business models regarding the returns necessary to meet their future liabilities. If those assumptions are too high, that means that pension funds will need much higher present contributions to meet future payouts or they will have to reduce payouts.  Recently Bruce Rauner , the governor of Illinois, practically went ballistic when one of the state funds proposed reducing their assumption by a mere 50 basis points from 7.5% I believe to 7%, for it meant the state would have to come up with hundreds of millions more dollars to plug the gap.  Of course in the real world they would have reduced their assumption by much more because they will be lucky to get anywhere close to 7% in coming years.  Insurance companies will simply go out of business when they fail to be able to pay insurance claims and annuities.  The whole retirement industry will stop at some point and an entire way of life will have ended.

Banks are probable losers.  The bread and butter model of banking is to make more on loans than you pay in order to have money to lend.  Being able to lend many times your deposit base helps, but a flat yield curve hurts bank earnings.  Nobody can say what happens if banks pay people to take loans.   If they get paid to raise money through deposits by charging people to hold their money in savings accounts instead of paying them interest, or they get paid even more to borrow in wholesale markets than they pay to make loans then maybe the system can continue.  Seems pretty farfetched though.  In a deflationary world, people may come to accept that getting less back than they deposited is ok.  Then again, maybe not.  As Gross also said, a world of negative rates is not a world in which capitalism can operate.

In general, debtors gain from negative real rates and lenders suffer.

Who are the biggest gainers? Governments of course, which is why there will probably be a push to go negative in the future. The US, Europe and Japan all have liabilities that they will never be able to repay.  They must undertake some method of default.  Straight default is onerous and unseemly with negative consequences for funding ongoing operations like wars and entitlements to buy votes.  Inflating debt away is the tried and true method historically.  Hence Keynes dictum observing Lenin: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency [inflation].  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose”.  This is of course why Gold, which as this century dawned (only 15 years ago or so) was selling for under $300 an ounce has ramped to $1900, and after a few years of consolidation is still well above $1300 and rising.

Corporations are the other major beneficiary.  Those who can borrow for free or nearly so (some better than free now as they perversely get paid to borrow) have been able to keep their executive stock option treadmill running nicely by borrowing to buy back stock which has the effect of increasing earnings per share and enriching themselves while those not on the option treadmill get nothing in the way of wage increases.  This has the effect of widening the gap between the rich and the poor and stoking dangerous populism.

On the positive side zero or negative rates makes corporate dividends look good by comparison and fosters movement from the lower left to the upper right in stock markets.  This keeps Wall Street and its denizens happy, while helping Main Street but a little because it has a salutary signalling effect to businesses and helps pension plans holding equities as well.  It also means that once fully priced, the future returns to equities are baked in the cake and low.  And as all that corporate borrowing has gone to repurchase their stock (there are only 3600 stocks or so in the Wilshire 5000 now) and not into productive investment, it is likely that future earnings per share will have a hard time increasing sufficiently to support extended valuations.  That sets up a future potential disaster if rates ever do rise for any reason, in which case stocks would simply crumble.  Hence the idea that the Fed has painted itself into a corner.  Rising rates hurt stocks and also bankrupt governments.  That is one of the more pernicious effects of Central Bank rate suppression, that governments have not had to exercise any spending discipline or risk credit retribution.  That may be fine after fighting a world war against fascism but what have we bought for it today?

Of course one important unanswered question is whether rates are lower than they otherwise would be in the absence of all this central bank activity?  What would the natural levels of rates be under current economic circumstances?  No one knows.  But one can hypothesize about effects.  Having the Fed or other Central Banks affect rates is a form of price fixing, where the price is the price of money.  It is the most basic economic truth about price fixing, demonstrated over and over again in the real world everywhere from Nixon’s wage and price controls in the 1970s to Venezuela’s utter mismanagement of their economy currently, that where a price of something is fixed below where the market clearing price would be, the result is a shortage. This implies that if the price of credit is held lower than its market clearing price, there will be a dearth of credit.  Certain measures of lending in the US imply that this is not the case, as lending is through the roof.   I do not pretend to know the answer.

Of course the reverse is also true.  A price fixed above its market clearing price would result in a surplus.  Were this the case it implies that there is too much credit available.  This fits with the argument about misallocation of capital more congruently, but again I do not know the truth. What I do know is that our experience with price fixing boards has resulted in stamping them out for the distortions they introduce.  Why we have not done this with the most important price fixing board that still exists (the Fed) is a mystery, as the economy would almost certainly work more efficiently at producing the optimal level of aggregate wealth in the economy without their interference.

After all there is simply no way they can have any idea what the right price for credit is, as they have amply and repeatedly demonstrated.  Which means that at ALL times the economy is working under a distortion that means the quantity of credit is either in surplus of deficit.  In the long run that cannot be the optimal configuration. Hence we must conclude that the right course of action, as it has been with all other price fixing boards, is to wrap up their business and wind them down.  Misallocation of capital is the result of fixing the price of credit incorrectly. Such misallocation lowers the long run aggregate wealth of the economy.

The simple truth is that the behavior of markets and businesses and the economy does not respond to manipulation of rates in a linear fashion as one drops them toward and through zero.  Zero and lower is wildly different.  If we cannot do away with the Fed altogether, and that seems unlikely, given the inertia the idea of having a Fed has, at the very least it would be nice if the members of the Fed had enough humility not to impose a negative rate regime on the US economy.  I am not holding my breath.

If they do usher in a negative rate regime upon commencement of the next crisis, there is one predictable effect.  If rates are significantly negative, more negative than the benefit of having ones money held for them in an institution, people will simply store cash at home.  To avoid this problem, people like Kenneth Rogoff, who had previously done a great service by writing “This Time is Different”, before going insane in pursuit of aggressive Statism, would have the government do away with cash altogether.  Such an arrangement, mandated by law, would represent a dangerous limitation on the liberty of the individual.  If all money were required to be recorded digitally and subject to oversight and manipulation (mandated negative rates for holding cash in the bank ledger) by the authorities, in order to encourage spending and penalize thrift, individual sovereignty would be the biggest loser of all.  That is a result that would represent a Rubicon-type watershed and would be grounds for revolutionary pushback by the afflicted, meaning everyone.  Tragedy indeed.

Why Rates Rose and Stocks Fell Last Week

September 12th, 2016 08:29 Central Time by Tom Bergerson

Long term interest rates curiously moved sharply higher last week as Fed officials were perceived to have turned more hawkish about raising rates, insisting that September was a live meeting for the Fed.  30 Year Bond Futures (USZ16) on Thursday and Friday went from just over 171 to just under 167 to close out the week.   Yields rose from just under 2.21% on Wednesday to 2.39% on Friday, over 18 basis points.   Now normally, in an environment of weak growth, if the Fed were to jawbone about tightening, one would expect long rates to go lower as this would imply even weaker growth and hence probably also lower inflation in the future.

30 Year Yield Daily
Click for Larger Chart

So what is going on?  Potentially, the market takes the Feds hemming and hawing about hiking rates as a signal that the Fed sees stronger growth and inflation down the road for some reason.  However given the Fed’s abysmal history of forecasting anything this signalling effect seems unlikely to be the operative dynamic in the marketplace. Most economic reports are middling to bad other than employment.  More likely is that markets are worried about either the ECB or BoJ wavering in their commitment to buying up all the long term debt issued in Europe and Japan.

Why?  First, one reason US rates have been dragged lower is the declining rates in Europe and Japan as their central banks buy up all the debt in sight (and equities in the case of Japan).  Those seeking positive yield have been attracted to Treasuries because they offer higher yield than sovereign or corporate debt abroad.  That liquidity flow means lots of buying of US debt which drags rates lower in the US.  But Draghi did not indicate any further expansion of the European program of central bank binge buying after their meeting last week.

Further, there has been talk of the BoJ doing a reverse Operation Twist as a sop to banks and insurers there who are complaining that the low differential between short and long rates threatens their viability because they cannot easily make money under such conditions, especially with nominal rates actually negative out past 10 years.  The prospect of having the price insensitive buyers exit the long end and move their buying closer to the front end would mean there is a lot more debt to be soaked up in the higher duration securities resulting in a hike in their yield.  And of course a hike in yield in the long end means that price sensitive buyers would have an alternative to stocks.  Hence rates rise and stocks fall.

S&P 500 Hourly
Click for Larger Chart

Queen Hillary Is Not A Subject of the Same Law As Mere Mortals

July 5th, 2016 13:16 Central Time by Tom Bergerson

There are really only three questions in response to James Comeys abdication of his duty in exonerating Our Majestic Queen Hillary the Corrupt in todays farcical outcome of the long investigation into her clearly criminal mishandling of sensitive national security information that has now fallen into the hands of foreign powers who will now be able to blackmail her should she become President of the Country Formerly Known as the United States of America.

First, what associates of the Clintons, whether Arab Princelings, foreign potentates or other domestic or foreign billionaires put up the money to pay off Jim Comey to clear her of a criminal outcome for her misdeeds?

Second, what was the price to buy him off?

What did Queen Hillary promise in return for paying off her only real threat to the nomination?

Make no mistake, anyone other than Hillary would be in jail.

Also, how convenient for Loretta Lynch to say she will follow the advice of the FBI in whether to indict.  She obviously knew in advance that the recommendation would be for no indictment.  What was the content of the conversation between the Queens Consort and our former President Bill and Loretta Lynch a few days ago on her private plane?  Could it have been to offer up the final price to buy off Comey?  An offer to join the Supreme Court maybe?  Whatever it was, it is clear the subject had to do with this whole coverup and conspiracy which will result in the destruction of what little shreds of soundness were left of our failing Republic.  The lot of them should be rounded up and dumped off a cliff.  Horrifying.  Disgusting.  Putrid.  Unseemly.  Criminal.

Yellen Suggests Equilibrium Real Rate for Overnight Money is Zero

June 16th, 2016 08:58 Central Time by Tom Bergerson

The most interesting tidbit to me in Janet Yellen’s post-FOMC press conference yesterday was when she was discussing the neutral real rate of interest (net of inflation) for an American economy running at trend growth near full employment.  She cited that there is some research that suggests that that rate is now zero percent.  Now think about that for a moment.  What she is saying is that there is no time value to money on short time scales.  Just a few short years ago the Fed itself had Fed Funds at 5 and 6% when stated inflation was running in the 2-3% range so representing an equilibrium real rate of around 2%.

She then actually went on to describe the reasons why it is so and that these reasons are durable.  Those are the two biggies which are rarely mentioned by the academicians though they are the two most important items on the intellectual scene; the demographic nightmare staring the developed world in the face and the poor showing for productivity in recent quarters and years.  I recently attended a talk by Jim Paulsen of Wells Fargo in which he theorized that productivity is not as low as reported.  Recall that productivity is a derivative quantity that falls out once you account for output and its labor inputs.  His theory was that output was higher than stated so productivity would then also be higher than reported.

But there is a second possibility, which has been talked about by Jeff Snider of Alhambra Capital in his writings at Seeking Alpha, and this is that labor has been overstated thus leading to an understatement of productivity.  I would buy that argument if for no other reason than the composition of labor has tilted toward part time work, partly at least due to Obamacare.  But then again, withholding taxes reported by the US Treasury have supposedly been very high and rising until the start of 2016 so there is some good evidence for a strong labor market prior to 2016, notwithstanding the tremendous drop in the number of those in the labor force.  I have yet to see anybody come forward with an argument how such taxes can be high but the labor market strength overstated.  It remains a conundrum as does so much else about the economy in the aftermath of the GFC.

Asymmetries in Society

June 2nd, 2016 22:08 Central Time by Tom Bergerson

So I am watching one of my favorite movies on AMC, The Matrix.  For whatever reason the censors have the guys bleeping out the word ‘shit’.  It is rendered by the overlord overdub as ‘shoot’.  This is on a cable channel at like 9:57 PM Central Time on Thursday night.  So we can have gay people getting married, chicks with dicks, supported fully by the “president” and Loretta Lynch his henchperson in the inJustice Department, choosing to relieve themselves in the ladies restroom, while down the hall, guy with tits is going in the mens room, and god forbid anyone has a problem with that.  But on AMC, they have to change the word ‘shit’ to ‘shoot’ to satisfy the censors?  At 9:57 PM on a Thursday?  Maybe since it is 7:57 in California they are worried little Susie or Tommy are still awake and watching?  No it most be because somewhere in Oregon someone with tender sensibilities is still awake with AMC on.  Or maybe the good folk in coastal Washington state.  Something does not add up here.  But this is still the best movie ever made despite this incongruity foisted on us in the Midwest after the kinderfolk have retired for the evening.

Summing Up the State of US Politics

April 5th, 2016 13:32 Central Time by Tom Bergerson

I am not a huge fan of Breaking Benjamin, though I like their music.  I had this song in my head and searched it on You Tube, Angels Fall.  It is about a family that lost their lives in a boating accident apparently.  The YouTube analytical engine then cued up another song, as it does, which was Breaking Benjamins Failure.  I like the song but have never paid much attention to the lyrics until I watched the video.  But it struck me that it sums up what is happening in America pretty much perfectly.  I have no idea if the band has any particular political view but these lyrics are timely.

Tired of feeling lost, tired of letting go.
Tear the whole world down, tear the whole world down.

Tired of wasted breath, tired of nothing left.
Tear the whole world down, tear the whole world down.


Yep.  That’s about it.  Burn their playhouse down.  Whether it is Trump or Sanders.  Just burn it down and hopefully something better rises from the ashes.  Our elite class of politicians ensconced for life in their insular world in DC are a massive failure and utter letdown from the promise of the American Experiment.

This song is so excellent I just bought the album.

With Apple Boycott Call Trump Just Lost My Vote

February 19th, 2016 15:34 Central Time by Tom Bergerson

I am not a big fan of Apple.  Not a huge fan of Trump either but I was considering voting for him as he represented a huge middle finger to the establishment.   I may just become an Apple fan and now will not be a Trump fan at all.  Trump apparently just called for a boycott of Apple because they will not roll over and accede to the outrageous and dangerous FBI request that Apple install a permanent backdoor in their phone encryption, essentially making encryption illegal in the US and rendering everyone’s data permanently transparent to the US government and to all governments who will be able to hack the backdoor (in other words everyone).  Whether Trump knows what he is talking about or not, there is now NO WAY I will vote for Donald Trump.  The US Government is not your friend, it is your enemy.  Trump should understand this.

UPDATE:  James Comey was out this weekend telling people not to freak out, that this wasn’t the end of the United States.  Right.  I have watched this asshole for years whine and complain that the FBI needed a backdoor into encryption, to be able to listen to anyone about anything at any time the FBI deems necessary.  In other words, he has been arguning that the FBI should be able, technologically mandated by law, to open any letter from anyone to anyone else at any time for any reason.  “Dont fret about wittle old me.  I’m not a phreat to anybone or anyfing”.  James Comey is one of the most dangerous men alive.  A President with any balls or sense of right or wromg (*not the current one obviously) would remove James Comey as head of the FBI forthwith.

IOER on Trial

February 10th, 2016 13:36 Central Time by Tom Bergerson

Today I watched the Fed Chairwoman in her semiannual testimony before the US House of Representatives.  The highlight, I think, was in the back and forth with her over the issue of Interest on Excess Reserves (IOER).  Representatives on both sides expressed their concern over what they perceive as subsidies to the big banks.  These too big to fail banks (meaning too big to exist for at least one of them), none of whom have been disciplined by the Justice Department nor excluded from the industry by the Fed over their role in precipitating the Great Financial Crisis, are being paid now 50 basis points in interest on something like $2.5 Trillion in excess reserves.  That is about $12.5 Billion dollars paid to huge banks for essentially doing nothing.  Much of that will make its way into bonuses for these same bankers held in such low opinion by our esteemed leaders (what does it mean to be held in low esteem by those who are themselves held in such low esteem?).

Yellen’s response was that IOER was an important tool for the Fed to be able to control rates in the prosecution of monetary policy.   She stressed that the Fed, through its holdings of securities (Treasuries and MBS purchased from these self same banks, in order to maintain the fiction that the central bank was buying in the secondary market and hence somehow not doing direct financing of deficit spending by the sovereign), was itself paid vast sums in interest and that this interest was paid to the Treasury and hence the taxpayer – many times what was paid to the banks in IOER.  In other words, don’t worry about how much we paid them, look at how much we paid you!

Of course the Representatives were not buying this, even those who actually understood what she was talking about, which I am sure was few.  Not the Chair, not the Ranking Member (one of the dimmest wits on the Hill).  So there is already a political uneasiness with this whole payment of interest to big banks for doing nothing.  And that is at a mere 50 basis points representing just over $10 Billion.  Now I ask, what would happen if the Fed was actually successful.  If the economy picked up and all the Fed hoped for and assured everyone would happen came to pass.  In order to keep those excess reserves from flooding out into the real economy and and leading to massive inflation in the real economy, as opposed to merely in asset prices, the Fed would find itself paying what, 100 basis points?  200 basis points, 300 basis points?  Whatever it is would have to be in excess of Fed Funds.  Fed Funds was more than 5% as recently as the middle of 2007.  That is not even 10 years ago.

Under such circumstances what might the hearing today have looked like?  Imagine the Fed was paying huge banks not $12.5 Billion at 50 bips, but $50 Billion at 200 bips or $100 Billion at 400 bips.  Now that $100 Billion she is so excited to have remitted to the Treasury and the taxpayer is all or substantially all paid out to bankers.  My guess is that there would be a calamitous uproar in Congress.  My guess is the Fed would face a significant threat to its independence.  So Ms. Yellen should be happy the economy is not expanding as it has in the past.  If so then does the fact she is so sanguine about paying IOER to bankers at the current level represent an admission of sorts that Fed policy has failed and in fact will be unlikely to work in the future?  If not, then Ms Yellen or her successor is likely to face an unpleasant  political reckoning in the indeterminate future.

UPDATE:  After thinking about this a little more the answer is that the only likely way the Fed Funds Rate target and hence IOER goes north of 2% in the near future is that the economy has rebounded such that the Fed needs to move rates up.  In other words their dream HAS come true.  In that case they would feel confident enough to allow their hoard of Treasuries and MBS to roll off the balance sheet as they matured so the pile on which IOER was being paid would shrink and the total payouts to banks would therefore fail to reach the catastrophic levels which would bring greatly enhanced political scrutiny.  Time shall tell how it plays out.

Jim Cramer And the Martin Shkrelli Show

February 4th, 2016 10:16 Central Time by Tom Bergerson

I just watched the House hearing with Pharma executives.  The highlight so far was of course the appearance of Martin Shkrelli.  House members of both sides put on their best clown costumes to ask him questions, having been already informed that he would invoke the 5th Amendment, in an attempt to make him look foolish or ridiculous.  Now Shkrelli does in fact look foolish and ridiculous on a good day, but these house members really discredited themselves with their nettlesome, fruitless and largely rhetorical questions which just kept coming.  And then they would pause after inane and stupid questions as if they really expected Shkrelli to answer or at least go through his rehearsed statement that he was invoking the 5th Amendment (Shkrelli is already under indictment in New York so his 5th Amendment assertion was real and necessary given that prosecutors no longer exercise any discretion appropriate to their status as representatives of the Bar, and will use any statement to support any absurd theory they can conceive of to get a Jury to provide them an indictment or a conviction).

A brief word on Pharma.  In general, they operate in the free market like everyone else.  If they see an opportunity and find a way to take advantage of it then great.  They do not have a duty to anyone other than their shareholders.  If they want to price a drug at a certain level then they can do so.  If the people these Congress people seem so concerned about, then that is too bad until the patent runs out, a circumstance Congress DOES has control over.  That said there is a huge built in problem with the incentive structure in Pharma.  That is that Pharma companies DO NOT have an incentive to cure any of the diseases they attack.  Rather their incentive is to fashion a chemical palliative that needs to be taken over and over to create a utility like stream of income.  Cures obviate the need to buy anything in the future.  It would be like selling a car that never breaks down.  Great the one time you sell it but as soon as everyone has one then you are out of business.  For this reason it is right to be skeptical of Pharma executives, they are not the good guys usually.

Any way back to the hearing.  So here comes Cramer commenting on the hearing, and I really need to do a separate piece making fun of how he talks, who goes on about how shameful Shkrelli is (yeah pretty much) but then goes on about how these are elected representatives whose very stature demands a modicum of respect, not smirking.  Whoa!!!  Urnnnhhhht.  Stop right there Jim.  These ARE our elected representatives in Congress.  People who are so brazenly stupid, duplicitous and absolutely worthless that you would have to be a cretin to assert they deserve ANY respect whatsoever.  They do not.  They deserve scorn, smirking and frankly to be strung up and then beaten until nearly dead.  Pretty much just about every last one of them.  So do the world a favor Jim, and just shut the hell up.  Moron.

Congress thought they were going to embarrass and discredit Pharma executives.  They succeeded only in discrediting and embarrassing themselves.

Bear Markets and The End of Two-Term Presidencies – Also, Bernanke Dooms the Markets

January 20th, 2016 17:31 Central Time by Tom Bergerson

It occurs to me that the last two times the US has entered the final year of a two term Presidency, the stock market has crashed.  Stocks made a high in March 2000, 8 months prior to the voting that elected Bush W.  Then they ground lower until March 2003 when that same W shared the stage with the UK’s Tony Blair to announce war with Iraq.  They then made a high in October 2007, just over a year prior to the vote that led W out and Dear Leader in.  The low was in March 2009, 2 months after Dear Leader was sworn in.  Will the high in July 2015, just 16 months prior to the blessed end of Obama’s relentlessly lying reign, also signal a drop of 50% form those highs sometime in the next year or two?

Well, one thing that happened in the run-up to the mortgage crisis that comprised the last bear market and financial crisis is that one Ben Bernanke, academic idiot savant, said that “the problems in the subprime market seem likely to be contained”.  A year after he said this in the speech on the Federal Reserves own web site, Bear Stearns collapsed and 6 months after that, Lehman Brothers.  Lately he has been at it again.  These days, the credit bubble of the day is in China, and it is an order of magnitude larger even than the subprime crisis that almost stopped the world.  Apparently Helicopter Ben said (thanks to Mish) “Bernanke also said the $28 trillion debt pile facing China was an ‘internal’ problem”.  Seriously.  Which of course means that it isn’t internal, but will likely lead to the end of the financial world as we know it.  Or something like that.  In any event it will be a large problem not contained solely to China.

Getting back to the stock market tanking at the end of two term presidencies, does the pattern hold further back than 2000?  Well the one before that was the transition from Reagan to Bush the Elder in 1988.  The market had its biggest one day decline about 13 months prior to that election and then an echo crash in 1989 less than a year after the election.  So I think that fits the pattern.  Prior to that maybe Nixon second term?  Well technically his second term ended in 1976, but he resigned in 1974 to avoid his impeachment.  The markets crashed in 1973-74 so I do not know if that really counts or not, but his second term ended right then so sort of.  The only semi-modern presidency of two term prior to that was Eisenhower.  The election that ended his second term was in 1960 when Kennedy was elected to succeed him.  The market went sideways to down in 1959 to 1960.  So sort of but not a big crash like the most recent 3 and now 4.


How Expectations on Economic Freedom Have Changed

January 18th, 2016 10:39 Central Time by Tom Bergerson

Just now I was watching CNBC and in a recap of what is going on this MLK day, Sara Eisen was talking about China.  She said “We are watching to see if the officials can stabilize the currency, as a sign that they are still in control of the economy and the markets”.  Think about that.  Has it become a common and unquestioned expectation that “officials” here or anywhere SHOULD be in control of the economy and the markets?  I mean, in my worldview, “officials” are spectators of the economy and the markets, whose only duty is to stay as unengaged as possible while providing the backdrop for economic activity to take place?  Which means providing a legal system for the peaceful resolution of disputes and possibly some infrastructure and finally a strong national defense so people do not have to worry about invasion?  Emblematic of how twisted and dangerous the conversation has become when commentators can pass on such nonsense as if it were the normal way of things.

The Two Main Channels Through Which The Fed Causes Wealth Inequality

October 31st, 2015 20:35 Central Time by Tom Bergerson

The Fed likes to do things in a cute way, calling the ways in which they affect things “channels”.  Too cute by half I would say, much like the SCOTUS with its thresholds and tests, but that is a discussion for another day.  It is now indisputable in my opinion that the Fed is one of the main causes of the much discussed wealth inequality plaguing the US.  Recently I saw an article about how the top 100 CEOs have as much in retirement savings as something like 50 million regular American households.  Pretty horrifying.

The main reasons this is happening are twofold.  First there is the simple fact that QE has caused nearly all inflation to manifest in asset prices.  A small and well to do segment of the population owns most of these assets, like stocks, so they reap the benefits.  The Fed justifies this to itself by claiming the “wealth effect channel”.  The idea is the wealthy, made even wealthier by QE, will spend more of their windfall profits on stuff made by ordinary peons and so the whole country will get wealthier.  The wealth effect channel.  Except that most people agree that the wealth effect is tiny if it exists at all.  It certainly does not justify the distortions it causes in myriad ways by causing social disharmony and fubaring the most important aspect of capitalism which is price discovery and the signals those send to capital to choose its outlets wisely.

The second channel is the “make corporate executives fabulously wealthy by ZIRP allowing them to print money for themselves” channel.  The way this works is that corporations can borrow money for very close to no cost, the cost having been forcibly suppressed by the Fed, and they can recycle this money into share buybacks which increase the price of their shares, which of course causes their regular stock option grant strike prices to go into the money and be very very valuable.  They can do this over and over again as ZIRP now enters its eighth year.  So it is no wonder that top executives make multiples now in the hundreds of times what their non-option granted employees make.  This dynamic is just disgusting and directly a result of the Fed flooring rates at zero for years and years.

There might be a third “channel” which is quite simple.  The noted problem with any kind of inflation is that it helps those who are closest to the money inflation the most.  Well, in the case of creating trillions of excess reseves through QE, those who are closest to the money spigot are the Primary Dealers and those who control them.  These people are literally paid by the Fed to buy and sell Treasuries and MBS.  No idea how much they make but it is certainly unbelievably substantial.  The Fed pays these banks between 5 and 10 billion dollars a year just in interest on excess reserves at 25 bips, to say nothing on the markups they surely command on the bonds they buy from Treasury and then turn around and sell right back to the Fed.

The unseemliness of this outrageous transfer of wealth to those who need it the least while Main Street remains stuck in squalor and penury with the Feds and their Bureaucrats with their boots on the necks of real business people can really only be fixed in one way.  That is to cut the Fed off at the knees by either ending it altogether or at the very least cutting it way way back to its only valid functions as lender of last resort and a way to have a solid clearing function.  Setting the price of overnight money and worse, engaging in fiscal policy through QE should be seen for what it is, an anachronism straight out of the 1930s.

The Necessary Revolution

October 12th, 2015 08:58 Central Time by Tom Bergerson

I am in the camp that believes, like Thomas Jefferson, that “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants”.  Our Federal Government has come to closely resemble that unbounded tyrannical monster against which our country rebelled in the late 18th century such that now is one of those times.  The problem is that with our bread and circuses, EBT, sports, video consoles and so on, no one really cares that the foundations of our Republic have been so weakened as to be about to crumble.  There is no spark to ignite revolt.  I wonder if that may be about to change.

On Friday, October 9th, 2015 Rick Santelli, father of the Tea Party, interviewed Dr. Lacy Hunt, one of the best economic thinkers out there in my opinion (and one of the only guys to work David Hume into his musings without missing a beat, God bless him), and they touched on the notion of negative interest rate policy (NIRP).  Just after 2:35 he hits the money quote which is that to enforce negative rates the Fed would have to “call in the currency”.  Calling in the currency might just ignite the spark of revolution.  Why?  Well it would arrogate even more power and control of peoples every day lives to the government for one thing.  How?  All transactions would have a digital record and be trackable by the Leviathan.  No more underground economy to supplement the livelihoods of those least able to withstand the overwhelming tide of regulation and taxation emanating from the Beast(s).

As an example, the Apple House near here sells their autumn haul at frankly ridiculous prices but the product is awesome so people pay…in cash only.  If NIRP comes to be they will have to use trackable forms of payment tech which means ultimately they will probably close, or prices will rise to adjust for the costs incurred.  Tax revenues will probably rise initially, but at the end of the day, the scope of activity will settle out lower than it is today.  And those people will know who killed their businesses.  And they will be pissed off, hopefully at the government.  Perhaps that along with other things will finally push people over the edge and spark the Necessary Revolution.

Lacy Hunt on NIRP at CNBC





Jill on MPR – Fair Foodies Friday Roundtable with Kerri Miller at the State Fair

September 4th, 2015 12:16 Central Time by Tom Bergerson

My wife Jill got in some awesome comments at the Minnesota State Fair when she was picked to respond about the effect of love in cooking on the outcomes thereof.  Jill is a trained chef who studied at the Cooking and Hospitality Institute of Chicago.  She was a pastry chef for Jean-Claude Poilevey at Le Bouchon on Damen Avenue.  Then she started her own place called Kaleidoscope at the intersection of Damen, North and Milwaukee in the space she bought from the Bongo Room right at the Damen blue line el stop across the street from the Double Door (where she saw the stones in a private little concert one day).  The food and atmosphere were awesome as anyone who ate there would attest.  Babies intruded and she eventually closed the restaurant as the crazy landlady wanted a small fortune to keep it open.  Anyway here is an mp3 of her well-received comments (Sameh Wadi of Saffron Restaurant & Lounge and World Street Kitchen in Minneapolis humorously offers her a job on the spot) {click to the left of the leftmost 00:00 if the Play/Pause image fails to show up, you can see it changes cursor if you hover over that area) (original Minnesota Public Radio page with the whole Foodies Friday podcast is at this link – go there is this whole page blows up in your face or something – Her part starts at about 6:40 in the podcast or at 45:15 minutes remaining if you use their backward counting player):


SCOTUS Renders More Wrong Decisions: Lack of Respect for US Institutions Justified

June 25th, 2015 09:46 Central Time by Tom Bergerson

Recently Gallup put out a poll showing that faith in the institutions in the US has fallen to all time lows.  And with good reason.  The President lies about Obamacare and everything in between.  Congress passes Obamacare using the most heinous and ridiculous parliamentary tricks and dodges imaginable.  The Supreme Court twice upholds what is clearly unconstitutional in the individual mandate and then says the statute did not mean to apply subsidies only to state exchanges as the statute says but to anyone.  They will undoubtedly find state failure to recognize gay marriages as unconstitutional.  It seems as if nearly every SCOTUS decision coming out is flat out wrong on both the law and the equities.

Whether it is because Roberts has been threatened by the black helicopter crowd by Obama and his evil minions or that he is plain stupid, the curse of W (the worst President ever before the current President raised the bar considerably and took the honors) comes back to bite us again and again.  It was W after all who appointed the now obviously moronic traitor John Roberts as Chief of the Supreme Court.  And he is young.  We can only hope he finds an accident or chooses to resign to spare the country decades of his incompetence in the highest judicial chair in the land.

The power and prestige of Nations wax and wane over the course of history.  I see little hope for the US, which is now well down the slope or into a considerable period of waning.  It will take a crisis of unprecedented magnitude to allow for a reset that can break the back of the government as it now exists and to put things on a better path so the fortunes of the nation wax again.  The ongoing loss of faith in our degrading institutions is part of that long drawn out process.

Hillary Already Disqualifies Herself With Email Horror Show

May 27th, 2015 13:52 Central Time by Tom Bergerson

The race for President has not even really started and already Hillary has absolutely disqualified herself for High Office.   She already clears the hurdle just by the fact that she elected in her best bad judgment to use a private email server to handle all of her official governmental email correspondence.  Why does that matter?  This is, or was, a representative republic where high officials (and Secretary of State qualifies there) are open to public scrutiny in the way they handle their public trust, that being the fact that they are representing the people in their office, not themselves.  That necessarily means that ALL of their official correspondence MUST be handled by systems run by and for the polity.  Running your own server to handle it is insufficient to ensure that in the fullness of time, the ramblings and decisions made in the name of the public are available for scrutiny.  And it matters not a whit if such has not been officially codified.  It is patently obvious by the nature of the American Experiment that it must be so.  Yet Hillary judged, wrongly, that it would be OK for her to hold HER official correspondence outside of officially controlled and administered systems.

Why would she make such an erroneous and poor judgment?  Why to allow her to brazenly undertake the next horrific, arrogant unbelievable action – deleting ALL of the correspondence on the server!!!!!!!!!  I mean we cannot have the plebs looking at what Queen Hillary had to say to anyone or how she made any of the judgments she made on behalf of the body politic in the future can we?  No.  Deleting the emails from the server she should not have been using for official correspondence is WAY WAY beyond the line.  But who cares what is beyond the line anymore.  I mean if the President of the United States can use his minions (Valerie Jarrett) to get powerful institutions of the United States Government (IRS) to harass his political opponents for him – something Tricky Dick Nixon could only have dreamed about – why would anyone care about a corrupt lying scumbag of a politician running their official US Government correspondence on her own server and then deleting anything on it to avoid the discovery of the improprieties which almost certainly resided thereon?

So if you find yourself itching to give old Hil a vote come next November, do us all a favor and either think better of it, or get in a fatal accident first.  And if she does happen to get elected, and I would not put it past a population that somehow saw fit to elect and then reelect a Muslim Communist who likely isn’t even eligible for the position as President, I can only hope that the Space Aliens who have so far refused to come to our aid by obliterating Washington DC (a la Independence Day) with all the asshats and clowns in it will do so in that eventuality.  But I am not holding my breath.  God Help the country formerly known as the United States of America.

Abuse of Discretion Just Feels So Good

April 21st, 2015 13:41 Central Time by Tom Bergerson

The latest judicial farce occurred with the verdicts rendered in the Boston Bombing Case.  We did not have long to wait as the very first count came back in all its ludicrous glory.  Count 1: Conspiracy to use a weapon of mass destruction.  Guilty.

What lunacy, what lack of judgment could have resulted in the prosecutor leveling such a charge?  What odious obliteration of the very nature of jurisprudence could have come back with a positive finding on that count?  Weapons of Mass Destruction?  Really?  They blew up a home made bomb.  By any definition that would include their method of murder as a Weapon of Mass Destruction, every weapon ever used in war or crime is a weapon of mass destruction.  By such a definition, David was guilty of using a Weapon of Mass Destruction when he took out Goliath.  What the Hell?

Don’t get me wrong, the idiots who killed those people in Boston are guilty of a heinous murder and deserve to die for their deeds, assuming they are the ones who did it.  But to try to dress it up as something it wasn’t speaks poorly not of the murderers but of our system of justice and particularly of the people who brought and prosecuted the charges in all seriousness, even though no reasonable person could have done so with a straight face.  The prosecutor should be disbarred.

Minnesota to Entrepreneurs: Go Away

April 9th, 2015 14:09 Central Time by Tom Bergerson

As I was looking to move my family out of fiscally bankrupt Chicago and Illinois two years ago, we took a vote and the result was to move to Minnesota where we have some family.  I did not know it but at the time Mark Dayton, the intellectually bankrupt governor of the state – who only assumed his position through a combination of Repubnicants splitting their vote between two candidates and his family name recognition as a latter day scion of the great Minnesota retail dynasty of yesteryear – was busily conspiring with the newly installed Progressive/Democratic (DFL or in other words evil) legislature to hike the top tax rate in Minnesota to a whopping 10% on income above a paltry $249,000.  Now that is one hell of a run-on sentence but I get breathless just thinking about the monstrous stupidity of such a thing.

Now imagine you are an entrepreneur looking to make it rich.  You could start your business here, but if you succeed, guess what, between the Feds and the State of Minnesota, you are going to pay 1 of every 2 dollars you make to inept, wasteful, incompetent, morally repugnant and progressively worse government.  Minnesota’s government is a damn site less wasteful and incompetent than the Feds or even most other state governments.  But still the idea of giving half your income to morons is not all that appealing.  Even the former top rate of 7.xx% was daunting and outrageous.  10% is just insane.  I would not have moved back to my childhood state had I known of this at the time a couple of years ago.  And it is likely I will leave this state after the kids get the excellent education on offer here (one of the good things that high taxes buys).  I am willing to pay more for honestly delivered services that improve the quality of life, but the surplus that has occurred is about to be wasted by the idiots in St. Paul.  It is wholly reprehensible.

I have also noticed that the education here, while excellent by most measures is geared toward a uniformitarian outlook well disposed to creating proper little corporate drones but not toward creating outside the box thinkers and business creators.  Almost no school systems teach anything about computer programming, the wellspring of the modern economic age and an absolute intellectual necessity for education in the computer age.  Having spoken to our local school board curriculum committee members, it seems that computer programming is though of as vocational training not worthy of serious scholarly pursuit.  Of course nothing could be further from the truth.  If taught properly computing is about logic, the very wellspring of reasoned thinking.

The emphasis on knocking off rough edges can be overcome but the very high tax rate needs to be killed if entrepreneurs are going to think of Minnesota as a good place to do their thing.

More Words That Should Be Banned From Common Use: Heartland, Absolutely

March 6th, 2015 11:33 Central Time by Tom Bergerson

In addition to “folks” which has been ruined by Obama cynically using the imply he is connected to the common man and Fred Thompson cynically using it in commercials to connect his sponsor to the common man, two more words that should be banned are “heartland” or the synonym “homeland” and most assuredly the word “absolutely”

I have been meaning to write this for a long time but I had put it off until I just heard on Bloomberg an image-shaping/building commercial by the Koch brothers wherein the female spokesperson tells us how Koch industries started in the “heartland” as if that means they should be just okey-dokey with everybody who feels an affinity with the concept of the heartland.  I mean I do feel such an affinity which is why I choose to live in the “heartland”, affectionately known as “flyover country” by the ruling and business elites on the coasts.  But I am not so craven or stupid to then uncritically buy into some image refurbishment campaign by anybody, even if I am glad they are fighting the good fight against the Progressive scum looking to subjugate everybody to their utopian collectivist vision of the country and the world.  And know that almost all of the agriculture that forms the basis of our country’s ability to produce wealth on an epic scale takes place here, a fact taken for granted by those elites.  Plus we do not get hurricanes or earthquakes here, and tornadoes are a much more localized danger.  Homeland should likewise be banned as well as its namsake Department which is now chiefly in the business of destroying our civil liberties and wasting our tax dollars rather than providing any additional kind of security.  But I digress as usual…

“Absolutely” makes the list not because it is prone to misuse that makes one want to puke because it is so blatant an attempt to buy us off, but merely because of its insane amount of overuse.  Nearly every person who is interviewed on the business channels I watch during the work day starts off nearly every answer to nearly every question with the reply…”Absolutely”…  The worst was some interview on CNBC I think with the CEO (THE CEO!!!) of one of the insanely overfunded technology companies, or social networking companies (not really technology, though they all seem to be set up in or near San Francisco or Santa Cruz).  He was asked about 10 questions in a two minute time frame and started the answer to every one of them with the word “Absolutely” and then managed to even insert the word a few more times into the meat of the answers.  It was …absolutely…ridiculous.  Seriously.

Aside from the fact that few things in the world are categorical or absolute, especially on the rapidly shifting sands of technology or any business, even in these times when the government retards the operation of creative destruction, it is just bad form to overuse and misuse such a word so badly and so often by so many.  I therefore humbly submit that these two words  – “heartland”/”homeland” and “absolutely” join “folks” on the list of words that everyone should retire from common use.

Valerie Jarrett

March 6th, 2015 11:08 Central Time by Tom Bergerson

I just watched an interview with the “President”‘s number one advisor, the shadow President of the country formerly known as The United States of America – before John Roberts finally threw out the document that our ruling elite progressively ignored more and more as an anachronism rather than the document setting out the powers and structure of our government.  Anyway, aside from that, what she said in the interview was most instructive.  Referring to the decisions and policies of the “president”, she did not then say “the Administration” or “the ‘President”s Administration” but rather she said “our Administration”.  Clearly she believes that she is essentially co-regent with Dear Leader.

Later on she then used words like “our policies” and “we” when referring to the goings on in the White House.  I hope she is enjoying her days in the Sun.  We now have multiple members of the Internationale running and ruining our country.  We should be so proud.