Posted by: Dr Churchill | July 8, 2014

5 big things Quantitative Easing folks and the Fed have gotten wrong and how to fix them

The Fed is doing a good job — Right?

Maybe or maybe not.

Let’s find out.

So let us examine this proposition carefully:

In recent years, we’ve seen more and more investment world complacency, about the ever growing stock market valuations and the obviously euphoric equities and capital goods asset price hikes.

It’s an inexplicable upward trend — until you start looking who is causing this tide of wealth. As an investor am certain yourselves also have seen nice growth across the board in all equities and the major indexes worldwide, from Dow Jones and Shanghai composite, to “No name Jones” indexes around the world. Even places suffering under dictatorships and serious malaise caused by democracy deficits, and economic mismanagement, and corruption to the point of bankruptcy — have seen their stock markets growing either through osmosis or thought the constant covert manipulation of the electronic exchanges. Take as an example the bankrupt indexes of Greece, Egypt, and Venezuela — where people adverse to emerging market risks are all flocking to skim a bit of butter off the top — assured of beneficial manipulation by the controllers of these exchanges. All playing the ride-the-pony until the greater fool gets stuck in position at this merry musical chairs game. One justifies this subversion of the spirit of Free markets by having to understand that the Exchange mangers do this customarily, in order to show signs of life in the moribund capital markets of these otherwise bankrupt countries.

So this Spirit of Euphoria is ever present amongst the major and minor players worldwide, and it appears to becoming so easy — like shooting fish in the barrel. So I have now officially called it the Game of Morons. A subtle metaphor for the Game of Thrones obsession running amongst the traders these days. The lesson is here staring you in the eye, but most young bucks lose it.

The simple take away from the Game of Thrones is that, th end is near and everybody gets killed…

Got it?

Unfortunately now, even among the savvy investors, investment bank economists, financiers, hedge fund managers, Market Makers, Bond Trading Houses, and similar white glove High Finance professionals — this summer time euphoria has spread like a contagion.

Yet this is contrary to the constant nagging belief that we’ve been here before.

Many times.

And we crashed and burned.

Again and again.

When you see the tide going far out in either direction — You know the tsunami is coming. The deluge… followed by Fukushima magnitude catastrophes with plenty of side effects.

A real Armageddon. Nuclear and otherwise. We know it and we called it for what it is since last November…

When you look in your heart of hearts — You know this too.

No need to read the tea leaves.

Only the theoretical armchair financiers don’t understand that.

Some leaders preach “Serenity Now” while others do their yoga asanas holding positions far too long thinking that it’s good for you. But being a market major and a Market maker is not Hatha yoga. It’s more like Kundalini and Ashtanga from Mysore.

It’s time for agile trading, light footed guerilla war and not heavy troop movements. Hide in the hills but don’t go wage war in the plains.

Some placidly greedy folks think it’s time to boost consumption and buy expensive yachts, chateaus, and aeroplanes.

And some friendly sales associates will sell you all their holding positions for a small uptick on their present day cost of carry.

That’s fine too.

And all is swell and is gonna be that way for ever. We’ve got to talk because this 4ever growing trend, is the mantra du jour — but am sure you heard that before. Probably just before the last collective lemur suicide. Lemmings chasing cliff side flight are plenty. Sane investors not so much…

Yet contrary to this wholesale euphoria, there are some not so friendly “prophets” who manage to see some clouds way off in the horizon, even though the pink champagne haze obstructs their vision.

Most just look at the view. Some speak up unafraid to disturb the party…

They politely say that inclement weather might be approaching. They say that they see rainstorms coming.

And they hold up their charts showing bubbles ready to pop everywhere.

Do you see that?

Do you hear the distant thunder?

What do you think?

Maybe time to exit… or not?

It’s something to think about.

Consider the options: In or Out.

Am just saying this because there has been tremendous growth in interest among financial professionals to find out where I stand on this.

I get asked this question almost daily, wherever I might be in the world.

From China to America and points in between, people ask me because they know me as the Great Contrarian.

So I started a small interest group of friends of Finance which, acts as an unofficial poll and a pulse getter of the sentiment of the large professional Investors that can move markets based on their sentiments and follow on actions.

Market makers is what we are called. M&Ms colourful and crunchy on the outside but sweet and moist on the inside with the rainbow of colours to express our freedom of Thought and our allergic reaction to orthodox doctrine of any kind. For us mainstream opinion is anathema and the daft souls who believe what they hear on the tube or even who watch the telly are simple serfs.

We are keen on listening to original insights, thoughts, and analysis borne out of experience from people who put their money where their mouth is. Much lie the proverbial horse…

And although we are a bit crunchy, ornery, and given to vices like the occasional brothel and tickle — we are far from insane physicists or beautiful minds mathematicians. Cue in here the music with John Nash entering the cafeteria.

Yes we are different because we are a applied science of Finance Think Tank more than anything else. But we are also a bunch of cool friends who share meditative insights around the fire — when the nights grow long and darkness engulfs even the most optimistic amongst us.

In a few years, this small group has grown to almost 200 members from the US, China, European Union countries, South America, East, Southern, and Central Asia, Africa, and the Middle East. Our discussions and our membership are strictly Chatham House rules and we will publicly flog you if you reveal anything about our Lot and our thinking except through eloquent articles like this, vetted in advance for publication. And before conspiracy theory overwhelms you — just realize we do this in order to maintain our Liberty in expressing whatever the “fvck” opinions we want without the serfs with the pitchforks or the barbed editorialists coming after us.

Besides our informal quarterly meetings — we draw once a year the smart people from the High Finance, the FDI, and the Long Term Value Investment world, to an event in Oxford where we orient ourselves against the orthodoxy of the City, Wall Street, Beijing Finance Street, and all other non sensical orthodoxies — and we focus instead on prophesy making. Reading the tea leaves as it were…

Since the 1999-2000 internet crisis — that I had fully predicted — washed ashore like a gigantic Tsunami and cleared away all the New Economy ruminants, by shearing off a few Trillion dollars of equity inflation, I suddenly found myself in demand. Sadly not for my leadership skills but for my prediction abilities. My newsletter was deemed a Must-Read by all the leaders out there and this has defined me since.

I founded the think-tank right then, so from the starting date, a number of themes have emerged.

Here are some Questions:

Was the crisis of 1999-2000 avoidable?

Does Capitalism need the blood letting?

Does this have to happen all too frequently?

Can we prevent recurring and devastating Crises by deflating the bubbles ourselves?

Is Natural Capitalism another path worth pursuing or just an exotic hippy hairy idea?

What is the role of the FED and all other Central Banks in relation to healthy markets and is their importance overstated?

Did the financial crisis of 2008 coming such a short time after the 2000 one help us understand the need to foretell and foreswerve and foreshore our Economies to avoid the Crashes.

Is our economy like the bumper-car lot where we need to constantly be crashing against each other to make this Life game a bit more stimulating?

Do we need to increase our sympathy and understanding for economics?

So here are some Answers: 

I have heard the same story from many people in finance. When the bust of 2000 (or 2008) happened, it did not fit what they had been taught in school, nor could it be explained within the belief systems of their leaders and colleagues in the critical networked institutions of the active and heavily traded financial markets.

Their next step was wonderment. Why led to reading, searching for answers, and then, finding the think tank of our market makers — the vaunted M&M — that enabled them to make sense of what had happened.

We led on the discussion forward because we think that the failure of the popular economic theories — evidenced by these inexplicable crises — has driven the search for superior ideas.

Yet today, despite the lackluster growth on Main Street, Wall Streeters appears quite happy with growth over the past two years. For the casual observer, one might argue that the Fed has managed things well, but what we see as problematic with the current approach, is that there are some of our most senior and serious fellows in the finance world that are totally skeptical of the Fed’s current strategy, and for good reason

Namely: The Fed has a series of mistaken theories supporting their belief that higher stock prices indicate the success of their policies.

The first is the thinking that asset prices are actual wealth, when they are only the prices of the capital goods, which are a form of real wealth. Asset prices, in real terms, are the exchange ratios between consumption goods and capital goods.

The second is that artificially boosted asset prices mean only that the owners of assets who bought them at lower prices have increased their consumption possibilities in relation to non-owners of assets.

The third fallacy is that the owners of most assets, the so-called “1%” are the only beneficiaries of Fed policies.

The fourth issue is that there is no systemic economic benefit to any particular value for stock prices. Young people saving for the future and entrepreneurs who are looking to pick up capital goods at bargain prices would find lower stock prices give them a better deal. This is the same as for any good.

The fifth represents the FED’s biggest error in believing that higher stock prices create a “wealth effect,” in which people see their asset values rise, feel richer, and consequently save less and spend more.

Follow the thought process here by reading on in order to explain further and illustrate all of these issues the FED has gotten wrong:

The FED’s black hole failure is that though their goal is to boost consumption through pumping up asset prices – the opposite is true. People put more money in the stock market seeing it as a form of savings and wealth creation, but we know that capital goods consumption is not savings by a long stretch of the imagination and they will inevitably realize they are buying into a bubble only when the shit hits the fan after the bubbles have burst wide open in a chain reaction event that will leave all of them shirtless.

However all the FED Keynesians, are in favour of this because they think that consumption drives production. Simple as that.

The Cure for what ails us is known.

It is also clear what we have to do.

Yet am afraid that it will take the FED a few more months to come to this realization. They usually have to arrive at the conclusion as a post Mortem. So after the cataclysmic event that will start unfolding soonest — the FED will shift course and that is the problem with Governmental interference in the Markets…

Correcting the illness after the patient has died does not make a Good Doctor.

A Good Leader is the one that decides to first cure their own faulty mindset, and then apply proper cure to his subjects.

Sound economic thought has recognized, at least since the classical school, that production must precede consumption, and that production drives demand, not the other way around. The Fed understands none of this because they have no understanding of the purpose of capital goods in the production process, which is to increase the productivity of labour.

The Feds believe this about home prices as well, which is arguably an even greater fallacy because homes are consumption goods. A rising standard of living means that we are able to buy consumption goods at lower real prices over time, not higher.

And finally, the Feds see the stock market as a sort of public referendum on their policies. They point to the stock market and say, “see, the market approves of what we are doing.” But when you realize that through its monetary expansion, the Fed itself is responsible for the rising stock market, that calls into question whether we can use it as independent measure of public opinion, or instead, the Fed voting for itself with money that it prints.

Seasoned financial thinkers understand this, and although we’ve mostly been seeking growth from the US so far, we are seeking our growth objectives in the emerging markets globally. And here is where, we see areas that are of particular concern, such as China, Japan, the BRICS, and the Euro zone.

For one the FED’s Quantitative Easing benefits China more than America. However, the system of Credit allocation in China is not market-based. They import the Fed’s inflation through their currency peg, which diverts dollars into their sovereign wealth fund where it is “invested” by bureaucrats in various forms of dollar-zone assets. Their domestic savings go into their banking system, where it is wasted on politically favoured projects due to non-market allocation of bank credit. The entire system is experiencing a series of bubbles in real estate and other sectors.

Their rate of infrastructure spending for comparably developed economies is about twice as high as normal. This is because the communist party officials are under great pressure to hit GDP targets — as if prosperity could be spent into existence by hitting a number. Infrastructure such as roads and empty cities present an opportunity to spend a large amount of money, all in one place, on a lot of Very Big Stuff, which under market-based economic calculation would be revealed as wasteful.

The problems in Europe are a combination of the massive debts that can never be paid back, the unfunded entitlements, and the growth in the burden on producers. This burden consists of the totality of regulation, taxation, inflexible prices and labour markets, and the threat to the confiscation of wealth. If you project these trends into the near future, I’m not sure where the lines cross, but the system is clearly unsustainable in its present form because it relies on sustaining current levels of consumption as fewer and fewer people produce.

So the five main points above are really the misguided FED’s efforts starting with Bernanke “The Beard” and the Cheney’s bush policies at QE easing or rather saving their brethren from getting a haircut. Now to wean off the mother’s teat the whole world who has come to rely on the FED’s massive QE for their daily bread — it is the sound of the other shoe falling now…

The next crisis I did really lived through, and weathered successfully, was the 2008 Lehman led Collapse and the resulting Sovereign Debt Crisis ushered in by the general banking sector collapse. Thing is that I had foreseen all that jazz and the coming wars, way back in 2003, and had moved to old England with wealth and all — converted into a better stable currency and access to the best financial and business centre the world has ever known.

We weathered the storm really well and provided solid returns of double digits through the crisis. And thus we are now prepping for when the next crisis appears.

The tsunami has been spotted heading for these placid shores and a New Heaven is required urgently.

We did well in this country.

Albeit I don’t fancy upping stakes once again, because the daft banker-wankers are throwing a greedy spanner in the works and are driving us all to another crisis.

But one has got to do what one has got to do. So am moving on and will let you now in due time where the next safe harbour is for us.

There is always a port of call where the girls are easy and the booze plentiful, for an old roustabout pirate.

Maybe Brussels?

Or Strasbourg?

Just kidding…

It’s always an adventure.

Please — don’t call on me because I am not gonna tell you and I don’t do interviews and I also don’t appear on daytime TV either. Just on the really really late show called Telepathy. That way you can reach me. Telepathy is good but Email also works pretty well for me.

But you can bet your bottom dollar that am busy on my way to the next Safe Harbour and greater returns for long term value.

Promise to let you know this November when this whole thing is over, and after your clocks have been cleaned by the seaborne justice for fools and maniacs that’s coming. It’s the promised Tsunami off the coast of Japan where it will hit first.

But there is hope — cause you can follow these articles here and maybe also register for the leadership newsletter and thus Be Totally Informed.

For the time run for the hills and occupy higher ground in places the tsunami can never reach to spoil your lunch. You can see the fools in the lowlands swimming away with the debris out to the open sea and offer tales of caution and courage to your kin — until the storm passes.

And if you are Good, really really Good and you want to play with us, you can contribute your erudite opinions, and intelligent analysis, with a bolt of spike and prophesy rolled into one.

Then and only then, we might invite you to our annual M&M gathering.

It’s the Oxford Analysis Think Tank of High Finance Conference in late November… and you might learn something there.

Or not.


Dr Kroko


Now the Feds have to stop their interference and let markets choose if they want to inhale or exhale by themselves.

Of course some emerging markets and the periphery zones of strong currencies will suffer mightily… but this is still far less pain than keeping up this charade of Quantitative Easing from the FED for far too long. Keep inflating the tire and when it blows it just might kill you.

So let’s not be damn stupid. Stop inflating the bubbles. he balloons are bursting all over…

At least One of the upsides of having a global thinking elite is that we know what’s going on. And we share…

We share the knowledge amongst ourselves freely, and with You too. Because we want to help you avoid walking blindly on the road to Serfdom.

However it’s your responsibility to seek, search, and find this wisdom before you internalize it. Because only then it’s worth it…

And thus you can have it for free from us here and now.

Whereas the politicians the moneyed folk, the petite bourgeois, the rich, the poor, the middle class, the economists, the deluded masses, and the peasants with the pitchforks — may have to wait for decades to find out who the Mafia bosses of their political life are, who the paedophiles in high places are, and which banks are criminal enterprises, or just bust ruins loitering on the high street.

yet for now am bidding you Adieu with these words from another Great Leader:

“Live a good life. If there are gods and they are just, then they will not care how devout you have been, but will welcome you based on the virtues you have lived by. If there are gods, but unjust, then you should not want to worship them. If there are no gods, then you will be gone, but will have lived a noble life that will live on in the memories of your loved ones.”
~ Marcus Aurelius

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