Those once called bonkers now point to where the madness lies

You talking to me, Liam? Its the coming QE driven hyperstagflation, isn't it.

As a result, the argument goes, we have "no choice" but to keep the Bank of England's printing presses in overdrive, pressing on with so-called "quantitative easing". And, clearly, any action to get the UK's disgraceful public finances under control would, given this deflationary threat, be "woefully premature".

The above paragraph, in essence, captures the consensus view now driving macroeconomic policy in both Britain and America – the "QE two". Yet it's completely and utterly wrong – not least as it's been formulated entirely to serve the financial vested interests that have so thoroughly captured these countries' political and policy-making elites.

I accept that UK inflation in September was low. But 1.1pc is nowhere near "deflation", which means that the CPI would remain negative for many months. The credit crunch has been in full swing for more than two years and it is only recently that the CPI has gone below the Bank's 2pc target, let alone breached zero.

Last month's CPI fall is entirely explained by the one-off impact of lower energy bills (tariffs were hiked last September) and last December's VAT reduction from 17.5pc to 15pc. Once these energy base effects wear off and the VAT cut is reversed, inflation will rise sharply. Core CPI inflation – excluding energy costs – rose to 1.7pc last month and would be 2.5pc had VAT stayed the same.

For all the talk that Britain is "slipping towards deflation", inflation averaged 1.5pc during the third quarter – above the 1.3pc forecast the Bank made just two months ago. The reality is that UK inflation has remained far higher during the credit crunch than the vast majority of economists expected.

At this point, I could rant on about how a few of us did warn that the threat of deflation was a self-serving myth, an intellectual deceit designed to justify the monetary incontinence we've seen since. Some of us were even called "bonkers" for our trouble and subjected to ad hominem attacks by government place-men within the Bank of England.

But we've been proven right. September was the low-point for the UK's CPI – and it's still a long way from zero. Given the impact of the recently falling pound on import prices, the Bank will be forced to increase its CPI projections in next month's quarterly Inflation Report.

With oil prices now rising steadily, having plunged during the fourth quarter of last year, the energy base effects will soon work in reverse, pushing the CPI up as fuel bills start to head skyward.

Even now, the Bank is forecasting 2.1pc inflation in the first three months of 2010 – further away from deflation. I'd say that's still too low. There are serious price pressures in the pipeline – over and above the "inconvenient truth" that QE means the UK will soon have tripled the size of its monetary base. When banks stop hoarding that cash, inflation will let rip.

Even before that happens, there are undeniable signs that supply-chain realities are now pushing prices up. In September, the producer price index rose for the first time in four months.

Which brings me, once again, to the "output gap" – yet another intellectual device that the City's pet economists have been using to justify our recent wildly expansionary policies (which, by coincidence have bailed out the banks that employ them, pumped up the stock market and ensured big bonuses are back in vogue).

For months, we've been told the credit crunch has created a "huge reservoir" of excess capacity and the economy's ability to supply dwarfs demand. So the government can print money and borrow like crazy without fear of stoking inflation.

This is total tosh. By starving firms of credit, this financial crisis has destroyed vast swathes of supply. I've said it many times before and now some serious people are starting to agree.

Last week James Bullard, the respected president of the St. Louis Federal Reserve, argued that America's output gap is "much smaller than is commonly believed" – not least because the credit crunch has caused firms to shut and workforces to disperse, so eradicating productive capacity. Bullard dismisses as "overplayed" the notion that output gaps will keep inflation low.

Unlike his Fed colleagues in Washington, Bullard is no White House lickspittle. He is a serious economist, well capable of independent thought. We need more policymakers like him – who cannot be dismissed as "bonkers", but who dare to highlight the madness of the current policy consensus.

http://www.telegraph.co.uk/finance/comment/liamhalligan/6359847/Those-once-called-bonkers-now-point-to-where-the-madness-lies.html

"I think we're going to experience a stagflation like we have never seen." ~ the Dude

The Lessons of Lehman...and Leeson
Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we're still recovering, they're choosing to ignore those lessons. President Obama

I burst out laughing when I read the above line in the President's speech yesterday. "The lessons of Lehman!" I thought, "he's got to be joking." I have no doubt Big Finance took that lesson straight to heart.

Let's consider the meaning of the "lessons of Lehman." Given the context, I suspect the President wants Big Finance to see the demise of Lehman as an object lesson- as one might warn a friend trying to ride out a hurricane in New Orleans by reminding him to remember the lessons of Katrina. If this friend had just moved to New Orleans and was unfamiliar with Gulf Coast hurricanes, the "lessons of Katrina" reminder would likely be sufficient.

If, however, this friend owned a house in the French Quarter and had ridden out Katrina the reminder of the lessons thereof might evoke a chuckle and a quick retort, "Katrina taught me that the French Quarter is safe." "The lesson of Lehman," Big Finance CEOs might chuckle to themselves, "is to make sure we're too big to fail." Lehman's balance sheet wasn't big enough, thus failure was an option for them, but not for the biggest banks.

Or so they seem to think.

One of the reasons I didn't write much over the past few months (besides a general laziness and desire to enjoy the summer) was a strong feeling, whenever I looked at the data, of watching a horrible car crash in slow motion. Better, I thought, to avert my eyes.

Yesterday I spent a few hours filling up my spread sheets and catching up on policy speeches and decided the feeling that came over me wasn't as if I was watching a slow motion car crash. I feel now as if I'm a position clerk for Nick Leeson, the bane of Barings Bank, and everyone in the country works for them.

As is my wont, when a feeling like that hits me a quick Google search for "Nick Leeson" is just a few clicks away. Among the more familiar reports I was surprised to find a scholarly examination of the event from NYU's Stern School of Business, about which, more later.

In the movie, Rogue Trader, Nick Leeson explains the secret of his success in a sound bite Big Finance would love, "You keep doubling up, and sooner or later you're bound to win." In the event, Mr. Leeson found this not to be true as the losses on his long position in Nikkei futures (and related derivatives) exploded after the Kobe Earthquake sent the Japanese market plunging early in 1995.

The lesson of Leeson is that doubling up is no guarantee of success. Indeed, according to the NYU paper: Our interest in Mr. Leeson comes from the fact that doubling strategies are potentially dangerous from a systemic point of view. An important attribute of doubling strategies is that the inevitable and devastating loss is preceded by a period of high returns with low volatility. Conditional on the bad event not having happened (yet), the doubler’s investment performance appears to indicate significant investment skill. The doubler may then become too big to fail, both from the perspective of the investment firm and from the market regulators, so that the inevitable failure can have catastrophic effects, both for the firm and for the market. Among other things, this has important consequences for the effectiveness of Value at Risk-controls. Being able to track and take out these traders sooner, would limit possible systemic risks.

Of course, I'm not arguing that Big Finance is doubling up on a hidden (losing) long position in the Nikkei. Their losses are reasonably well known (if not well quantified) and, at least with respect to real estate, not about to turn into profits any time soon. This rogue is out in the open.

Like Leeson, Big Finance doesn't consider liquidation, which would realize the losses, an option. Like Leeson (whose book would make a great study in a Psych course), Big Finance would have us believe their motives are pure. I, however, find this view from the NYU paper interesting: That managers take additional risks to escape from a threatening situation is a well known theme in the field of managerial decision making. For example, Shapira (1997) and Kahneman and Tversky (1986, p. S258) show that people will take greater risks to escape losses than to secure gains. As a consequence, people's behavior tends to change in unexpected and unattractive ways when they are confronted with increasing losses. Thus in finance, where many occupations are high-wire acts, the fear of falling is constantly in the background and sometimes can lure people into disastrous activities. Individuals can become gripped by a frantic panic and may try to conceal these losses, or double up their bets like crazed gamblers trying to punt their way out of their mounting debts. This is the classic gambler’s fallacy.

There are, however, differences between the two.

Unlike Leeson, Big Finance has a supporter who agrees that liquidation isn't an option in the form of the Fed. If Nick had the Fed on his side he could have held on for a few more years (although current levels around 10K for the N225 suggest a loss orders of magnitude larger). The Fed (and Treasury) upon discovering the huge losses, not only provided liquidity to Big Finance, they provided capital support and relaxed accounting rules. As many others have covered (so I'll be brief) this support is unprecedented and ongoing. The "tide" of liquidity is high, as Warren Buffett might put it, and financial markets have responded (albeit with far less bang per buck).

Thus Bernanke, Geithner and even President Obama are engaged in a bit of cautious back-slapping.

This back slapping reminds me of another scene in Rogue Trader: 1994 is coming to a close and Leeson is long Nikkei futures and short Nikkei calls. The price is shown in big numbers, dominating the screen. He cheers and congratulates his team as as the Nikkei keeps rising and closes on its high.

In the NYU paper on the event the authors write: Leeson first sold options on the Nikkei index in October 1992, but his activity in this market really started in the second half of 1993. The value of the option portfolio fluctuated wildly over time, but it had mostly been positive. The highest value was reached by the end of December 1994, when the total value of the options was approximately US$178 million. Mainly due to the Kobe Earthquake, this reversed to a loss of approximately US$108 million by the end of February 1995 (SR App. 3K, p.179)

Given that he wasn't unwinding his risk into the rally, the cheers and back-slapping in December 1994 proved a bit premature. I'm pretty sure if he tried to unwind his position the market would have reversed.

Given that Big Finance isn't unwinding its balance sheet (I know that position can't be unwound without serious market damage) in the current environment, I suspect Bernanke's victory laps and Obama's reassurances may also prove premature, if, as I suspect, the transfer of "toxic" debt to the Fed proves as successful as similar operations in Japan. The reason for this, I surmise, is that such transfers merely buy time, which, when the losses are a large percentage of GDP, is only useful if one can grow out of the problem (which would require rapid growth) or if underlying conditions which created the loss, reverse.

These "underlying conditions" are the crux of the issue. When positions sizes are small enough for a given market, managers can play (and win) under the greater fool theory. The illusion of demand can be created long enough to sell out (or vice versa). However, when positions grow such that they cannot be dumped, the greater fool theory is disproved- you are the greatest fool. This doesn't necessarily guarantee a loss. It does, however, bring finance back to its beginning- the bets must prove out in the real sector.

Thus my concern.

Leeson bet the ranch on Japan returning to its go-go days. But Japan was an aging population with high wealth concentration in the aftermath of a bubble- a perfect recipe for risk aversion. Fortunately, Japan could self-finance and until recently seemed reasonably content to be a mature economy.

Big Finance, in a far more profound sense, has bet the ranch (our ranch) on the US returning to its go-go days. But the US (somewhat obscured by looser immigration standards) is an aging population with high wealth concentration. From whence will come the next productivity enhancing investments that (importantly) can operate within the existing capital structure (since liquidation is off the table). The computer and related communication boom was a perfect way to extend the life of the post WWII infrastructure, but those productivity effects are in the past.

Unfortunately, unlike Japan, we cannot self-finance. We need those capital markets flowing, however inspired.

Thus we took a page from the BoJ playbook and adopted a ZIRP (the world's reserve currency managers opt for a zero interest rate policy....amazing), and the effects are manifesting. Cheap $ finance is already working its magic in the commodity and equity markets. Gold is trading at $1000 as the US$ nears all time lows.

We're inflating all right, but the US real sector will be last in line to catch those flows- the conduits are broken. In the 90s above trend employment growth came, as noted, from the Tech boom, albeit with income gains that were far lower than in previous post WWII expansions. During this century there was no above trend employment growth and income is lower. The real estate wealth effect kept people happy on the margin but that is over too. Once a critical mass of the population is underwater on their mortgages real estate inflation will lag, not lead, more general inflation- an effect we would have experienced in the 90s but for the Tech Boom.

As a comic aside, we are like a team of old baseball players who just got purchased by Steinbrenner and don't want to be replaced by newer younger guys.

I think we're going to experience a stagflation like we have never seen.

But first, we will see a Leeson-esque collapse, first of the US$, and then, when they try to tighten to save it, of large chunks of Big Finance.

Sudden and swift.

I could, of course, be wrong.

Have a nice day.

http://dharmajoint.blogspot.com/2009/09/lessons-of-lehmanand-leeson.html

Reflation Contemplation ~ Nolan

Stock prices traditionally lead economic recoveries. Securities markets tend to react swiftly to loosened monetary conditions, while it takes some time for loose Credit to work its way through to the bowels of the real economy. Highly speculative markets react haphazardly, sloshing liquidity out and about. As is commonly understood, employment conditions are a somewhat lagging economic indicator. Most analysts have been content to read nothing of significance from ongoing poor jobs and housing data. Overwhelmingly, the bulls rely on faith - and history - that surging stock prices are discounting the usual “V” rebound.

Data this week should have those of the bullish persuasion on edge. July retail sales were much weaker-than-expected (down 0.1% vs. expectations of a rise of 0.8%). Retail Sales excluding auto sales were down 0.6% for the month (down 8.1% y-o-y), the largest drop since March’s 1.1% fall. Looking back, there was no mystery surrounding first quarter consumer weakness. But even after a dramatic stock market recovery, July’s Department store sales were down a dismal 1.6% for the month (down 9.6% y-o-y). Even Wal-mart management commented that their customers were “selective” and remained keenly focused on value.

Today’s preliminary report on August University of Michigan Consumer Confidence was also a big disappointment. The consensus called for this confidence reading to jump three points to 69. The actual report came in down to 63 - to the lowest level since those dark days of March. Readings on both “Economic Conditions” and “Economic Outlook” dropped to five-month lows.

Yesterday, RealtyTrac reported that U.S. foreclosures jumped to a record 360,149 in July. This was up almost 7% from June and 32% higher than the year ago level. And there’s no relief in sight. American Bankruptcy Institute data had 126,000 Americans filing for bankruptcy in July, up 34% from a year earlier. It is now expected that 1.4 million will file for bankruptcy this year.

Meanwhile, the economic optimists take comfort from this week’s readings on Non-farm Productivity, Wholesale Inventories, Industrial Production, and Capacity Utilization. Positive data out of Europe and Asia also seem to confirm that some type of global economic recovery has taken hold.

From my perspective, this week’s data confirm important aspects of Credit Bubble analysis. First, ongoing headwinds will restrain rebounds in U.S. housing markets and household consumption - for an extended period. Second, the overall U.S. consumption-based economy will lag those of most of our more manufacturing-oriented trading partners. In short, we are witnessing anything but typical reflation dynamics, and those expecting a typical U.S. recovery will be disappointed. Our economy remains overly exposed to U.S. consumption, while having insufficient manufacturing capacity (and resources) of the type to benefit significantly from heightened global demand.

Returning to the stock market, I see nothing typical going on there either. With the Morgan Stanley Retail Index and the Morgan Stanley Cyclical Index up 56% and 49%, respectively, the marketplace apparently has no issue with the recovery. I suspect these gains have been inflated by short covering. Indeed, market dynamics likely explain much of the divergence between ongoing weak underlying economic fundamentals and robust stock prices (especially in the consumer arena).

Unusually large bearish hedges and bets had been placed against the (consumer-driven) U.S. economy. Unprecedented fiscal and monetary policy crisis response stabilized the Credit system, setting in motion a self-reinforcing unwind of “bearish” positions. In the past, such a reflationary dynamic would have seen stock prices for the most part accurately discount the future direction of economic activity. Stated differently, the reversal of bearish positions (and resulting short “squeeze”) would traditionally have (reflating) stock prices portending recovery and a return to the previous trajectory of economic performance. In general, a rejuvenated Credit system - and the resulting recovery of financial flows - would ensure that the “bear” case was proved wrong.

This time may be different. I would not be surprised if the confluence of unusually large bearish positions, unprecedented policy response, and a resulting major “squeeze” created a backdrop where the stock market was turned into a rather poor foreteller of future prospects. From my vantage point, I certainly don’t believe stock prices today generally provide an accurate reflection of underlying company fundamentals. And from an economic perspective, I suspect the stock market is missing some key underlying dynamics that will shape future economic performance.

In particular, equities seem to be discounting a return to business as usual when it comes to the U.S. economy. Retail and the “consumer discretionary” sectors have been among this year’s stellar performers. And, yes, this does fly in the face of my analysis of new economic realities and a permanently downsized role for household consumption in the U.S. economy. At this point, I view this as an anomaly at least partially explained by the hastened reversal of bearish positions. But I also recognize that massive fiscal and monetary stimulus has been implemented with the policy goal of sustaining the existing economic structure. The market has been content to play this dynamic expecting policymaker success.

As I attempted to explain last week, I view the impairment of the stock market discounting mechanism as a key facet of Monetary Disorder. The reversal of bearish plays not only created huge buying power throughout the markets, it decisively reversed The Greed and Fear Factor. Notwithstanding today’s sell-off, the bulls are greedy and the bears are on the run. And the more that inflated stock prices entice shorting, the more games that can be played to “squeeze” the timid bears.

The end result is a highly speculative stock market increasingly detached from reality and vulnerable to wild swings in sentiment. Yet I don’t expect the emerging global reflation to this time disprove the U.S. bearish thesis, although it will no doubt be a wild market ride.

The bond market was happy with this week’s developments. The Fed confirmed it will be especially unhurried in raising rates and ending quantitative easing. Weak U.S. economic data was seen as confirming the bullish bond view. To be sure, low market yields at home and abroad are imperative for global reflation to gain a head of steam. And I would argue that (over-liquefied) bond markets are subject to their own pricing anomalies. In contrast to stocks, bonds have been fixated on U.S. economic vulnerabilities and the Fed, while content to downplay reflation risks. This week’s data doesn’t have me second-guessing the thesis of bond market vulnerability to global reflation dynamics. For bonds as well, the backdrop is set for a wild, speculative market ride.

http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10259

Timing withdrawals is always tricky....

Zero Hedge looks at the "monitisation debate", the key question who is actually buying the treasuries? You can be sure that the US government is..thats what QE is all about. The question is this; can Ben keep pumping the stimulus until it works and yet still "pull out" before hyperinflation and a reserve currency credibility crisis is well and truly conceived.

As a strategy it has all the same failings of the contraception technique: skewed incentives and an "agency problem" of deep discontinuities in the costs and benefits.

Hmmm.....

A bigger question is the degree to which the US stimulus is working, it looks like it probably; its enabling massive credit creation in China.....


The startling conclusion: $32 billion of Treasury Bonds spread across 7 CUSIPs, were purchased by the FED within 10 days of their initial auction and allocation to primary dealers. The amount purchased by OMOs represents an average of 32.4% of the total allocated to primary dealers in the respective auctions. Furthermore, almost two third of total OMO Operations for bonds issued in 2009, or $62 billion, affects Bonds issued within 30 days of the OMO purchase. These purchases account for a total average of 29% of the total amount allocated to primary dealers. While one may make the argument that on the run bonds are preferred on average by the Fed for purchasing and by the primary dealer community for selling, the data presents a marked skew in the Fed's desire to monetize very recently issued Treasuries.

The key questions remain: allocations to primary dealers in 2009 Bond auctions is an undisputed majority (55%) of all auctions - this is troubling due to the the recent change in the definition of indirect purchasers as well as the markedly reduced interest of foreign buyers such as China and other indirects, for US Treasuries. Could a reason for the Chinese lack of appetite be due to the fact that while primary dealers represent not just a majority of all Treasury purchases, that these dealers may also have an implicit understanding that come hell or high water for auctions that lack indirect interest, the Fed could potentially make any dealers whole on purchases and subsequent sales at a loss such as the highlighted CUSIP 91282LD0 example (explicitly, at a loss for taxpayers who have to fund the primary dealers shortfall, in this case the difference between 99-26 and 99-07)? Would the Chinese be interested in playing in a rigged playing field when indirects are potentially impaired vis-a-vis direct purchasers? Furthermore, is Bernanke pulling a Clinton and while claiming under oath the he is not monetizing debt, he is effectively doing just that on well over $30 billion in Treasuries, which the Fed acquires within 10 days of issuance? And lastly, is the rapid uptake by the Fed a means to goose up auctions which have a potential likelihood of failure: the 7 Year in question came hot on the heels of a 5 Year that for all intents and purposes was quite close to a failed auction? Absent an implicit backstop, which everyone knows the Fed is very keen on making these days: as the SigTarp demonstrated, to the tune of tens of trillions of dollars, what is the likelihood the 7 Year would have fared as well as it did, had not the primary dealers really stepped up, for reasons known and unknown.

Zero Hedge is not making any claims, but merely asking questions. And while we appreciate the opinions of self-professed experts such as John Jansen, these answers should really come from the proper authorities - the US Treasury and the Federal Reserve of the US.

As time allows, Zero Hedge will next conduct a comparable study on Agency and MBS debt repurchases by the Federeal Reserve.

http://www.zerohedge.com/article/open-market-operations-and-statistics

Hyperinflation or deflation?

At present, the investment community is divided as to whether the world economy faces hyperinflation or deflation. Some observers are convinced that the central banks’ printing press will take the world towards hyperinflation whereas others believe that the ongoing contraction in American private-sector debt will result in outright deflation. So, what will the future bring?

It is my contention that we will get neither hyperinflation nor deflation.

What is more likely is that over the coming months, we will get another deflationary scare. Any sell-off in the markets later this year will be met by an even larger stimulus from the policymakers and this will ultimately result in high inflation.

So, I maintain my view that due to the unprecedented policy responses around the globe, the world’s economy will face high inflation over the medium to long-term. And the general price level will double over the coming decade.

In the near-term however, we will probably get another period when the market will (once again) become concerned about the prospects of a lengthy economic contraction. It is conceivable that the ‘green shoots’ hype currently doing the rounds will soon be replaced by more economic worries as a second wave of foreclosures hits America later this year. So, it is possible that before year-end, we will witness large corrections in stocks and commodities. Conversely, we are likely to see big rallies in US government bonds, US Dollar and Japanese Yen.

This near-term vulnerability in the markets is the reason why I have recently liquidated our ‘long’ positions in resources and emerging markets and gained a heavy exposure to long dated US Treasuries. In my view, a defensive investment stance is prudent at this juncture as it will protect our capital and allow us to profit from the expected contraction. Once the pullback in the markets is complete, I will liquidate our positions in US Treasuries and re-invest our capital in our preferred holdings in energy, materials, mining and emerging Asia.

Look. In the business of investing, the tape never lies and it is worth remembering that Wall Street is littered with the graves of those who got married to one particular outcome and then held on to their ill-conceived notions. At this point, when private-sector debt contraction in America is locking horns with central bank inflation, I prefer to have an open mind. Therefore, I am maintaining a defensive near-term investment position. If the market corrects over the following weeks, I will be in a position to profit from such a decline. On the other hand, if the major indices simply consolidate here and break above the recovery highs recorded last month, then I will have no hesitation in changing my defensive investment position. Put simply, I am currently watching and waiting patiently for the market to reveal its hand.

Coming back to the subject of this essay; the reason why I don’t foresee immediate hyperinflation is due to the fact that the velocity of money is currently weak. In other words, at least for the moment, the private-sector in America isn’t participating in Mr. Bernanke’s inflation agenda. Despite the fact that Mr. Bernanke has injected a massive amount of reserves in the banking sector, this money is currently sitting as excess reserves within the American banking system. The fact that this money isn’t being lent out rules out immediate hyperinflation. However, once the American economy stabilises and the velocity of money picks up, these excess reserves will trigger a massive inflationary wave.

As far as deflation is concerned, I am of the view that the policy responses and our fiat-money system will ensure that the purchasing power of cash will continue to diminish over the medium to long-term. In fact, I am willing to bet that cash will probably be the worst performing ‘asset’ over the coming decade. Remember, in today’s monetary system, central banks and governments the world over are free to create money out of thin air and this will prevent outright deflation in the global economy.

It is worth noting that in the past six months alone, China’s commercial bank credit has expanded by a whopping US$1 trillion! Figure 1 highlights the surge in Chinese bank lending. Furthermore, credit is also expanding frantically in other Asian nations. So, contrary to the West, monetary policy is still alive and well in the developing nations and this factor also rules out outright deflation in the global economy.

Figure 1: Explosion in China’s bank credit



Source: Bank of China

In my opinion, rather than hyperinflation or outright deflation, we will witness elevated inflation after the American economy has stabilised. In the interim however, investors should be prepared for another deflationary scare and the associated market panic.

Puru Saxena

Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com

a sugar rush for insolvent banks..

The idea is that the proceeds of such sales boost the money supply and kick-start lending. By decreasing the supply of gilts in the market, QE is also meant to push up gilt prices, driving down the yields that determine borrowing costs right across the economy – not least for commercial loans and mortgages.

At this point, people in my position are supposed to explain that QE isn't "printing money". I'm not going to do that. For the only difference between the UK's current policy and Zimbabwe-style economics is that QE involves the creation of electronic balances rather than actual notes.



That last paragraph will have caused a sharp intake of breath among my friends in the higher-echelons of the UK's economics profession. Unable to dismiss me as a "non-economist", they'll say I'm being alarmist – perhaps due to some kind of personality trait.

I would suggest they sit down, turn off their mobile phones, take a cold look at the evidence and then ask themselves if they've got the guts to help expose the madness of the current policy consensus – the debt-funded fiscal boosts, the non-conditional bank bail-outs and, above all, QE.

Over the past three months, the Bank has spent £106bn of QE funny money. By the end of July, it will have purchased the £125bn of assets it has so far been authorised to buy. At this week's meeting of the Monetary Policy Committee, interest rates will be held at 0.5pc. But, with the original QE "pot" almost gone, the Treasury and Bank could well signal there's more to come.

I accept the start of QE caused share prices to rally and business sentiment to improve. But that sugar rush has gone. The harsh reality is that despite the huge inflationary dangers posed by QE, the credit crunch is getting worse.

The Bank of England has more than doubled the monetary base since March, yet mortgage approvals remained at 43,000 in May – consistent with house prices falling at double-digit annual rates. Lending to non-financial companies contracted 3pc last month.

Banks are keeping the QE cash on reserve or lending it to their own off-balance sheet vehicles (the ones stuffed with sub-prime toxic waste). So rather than helping solvent firms and households access credit, QE is re-capitalizing, by the back door, banks that are otherwise insolvent and should be going bust. Gilt yields haven't come down either. The 10-year yield remains where it was before QE began, having been much higher in the interim.

Around a third of the Bank's QE purchases are, anyway, from overseas investors – doing nothing to ease credit in the UK. Such sales by foreigners reflect mounting concerns about the UK's wildly expansionary policy stance and sterling's related medium-term fragility.

As someone who spends a lot of time talking to overseas asset-managers, I can't tell you how often I'm asked: "Liam, why this money-printing? Have your politicians gone mad?" I can only reply that I ask myself the same thing.

There is, in extremis, an argument for QE, but only to buy commercial paper, not sovereign debt. When used to re-purchase gilts, QE allows governments to carry on borrowing like crazy, rather than facing up to the reality the country must balance its books.

When QE was announced, the emphasis was on the commercial debt purchases the authorities would make. In the event, gilts have accounted for a staggering 99pc of the total. That's why QE will inevitably lead to high inflation – whatever nonsense is spouted about "withdrawing the monetary stimulus".

History shows you can't get the inflationary toothpaste back in the tube. That's why price pressures are rising – and gilts yields refuse to fall.

At the outset of QE, the Tories called it "a leap in the dark" – failing to reveal if they backed it or not. Since then, HM Opposition has been silent on a policy that's destroying the last vestiges of this country's policy-making credibility.

Such credibility is what keeps inflation benign and borrowing costs low. By providing a solid macro-economic platform, such credibility is vital if this country is to create the jobs and wealth that will be so important to our citizens in the years to come.

Such credibility, tough to win, is easy to lose. Because of QE, the UK is now losing it – at breakneck speed. Yet those who will form our next government are silent – not yet in power, but complicit in this grotesque policy vandalism.


http://www.telegraph.co.uk/finance/comment/liamhalligan/5742424/QE-just-acting-as-a-sugar-rush-for-insolvent-banks-that-deserve-to-fail.html

"Gold's in a major 3" say the Gold Guru, the jailed long waver and the technician

They said that housing was a bubble and that the stock market was doomed so they might be right, but like then, early. But they likely have the big picture plain. Peter over at arabian money sumarises the last few penny drops as follows...



1. Gold reacts as currency support for the dollar enters mid June to a slow decline (that is the official definition of a strong dollar policy, really).

2. End of 2nd week going into the beginning of the 3rd week of June Gold launches towards and this time through the neckline of the reverse head and shoulders formation.

3. Gold rises to $1224 where it hesitates.

4. The OTC derivative market takes on the dollar as short sellers into dollar support.

5. This OTC derivative currency short position builds.

6. It is the US dollar where Armstrong will get his WATERFALL.

7. The main selling takes place when Israel makes a major miscalculation.

8. Hyperinflation is always and will continue to be a currency event.

9. Hyperinflation will be a product of the upcoming massive OTC derivative short dollar raid.

‘Should I be correct in the gold price action going into late June, it will fit Armstrong’s criterion for a move to $5,000′, adds Mr. Sinclair whose predictions are not always right, and who got similarly carried away last summer.

But there is the old mantra in forecasting that if you repeat something often enough then it will be bound to happen in the end. And to be fair to Mr. Sinclair the gold positive scenario stacking up right now does look unstoppable.

http://arabianmoney.net/2009/05/27/jim-sinclairs-immediate-predictions-on-the-gold-price/

Markets to fly on a sea of money ~ Marc Faber

The Fed printing presses are turning at full speed as the government is monetizing the debt by printing more money said Marc Faber yesterday . "from 2002 to 2007 We had this huge bull market in asset prices, during which everything went up. Commodities, equities, real estate worldwide , even bond prices and art.

Then came the big awakening, credit growth began to slow down and in 2008 everything collapsed except for bonds and the US Dollar, because global liquidity was shrinking and that was dollar supportive. And then we had the beginning of the recession at the end of 2007 and the global economy fell off a cliff between September of 2008 and March of 2009.

I think the rate of deceleration is now diminishing, we still have bad news, the global economy will not recover in a long time but it is not going to deteriorate much more. And we have a huge effort by governments worldwide to create fiscal deficits, in other words to print money. For that reason even if the world economy does not recover you will have a strong recovery in asset prices."

Budget 2009 ~ Spend while you can, its competitive devaluation time!

The prediction that the Global Financial Crisis will end in 2011-12, and that the economy will then experience above-trend growth of 4.5 percent a year for at least two years is the big intellectual flaw in the budget.

That prediction is based on the assumption that the economy will always return to 3 percent growth after any short term disturbance.

The Treasury’s one concession was to add an additional year where growth was expected to be below average–so rather than forecasting 3% growth in 2010-11 as it would normally do, it assumed growth of 2.5% for that year. But it then assumes growth of 4.5%.

But with american dollar deficits baked in the cake and with inflation just getting warmed up I expect the bills will be paid by way of massive inflation as part of a general final crack up boom.

If thats the case, and seeing that governments everywhere are buying their own bonds with freshly printed money, that that seems likely, then maybe spending like crazy because everybody else is the most rational response to the crisis.

Better buy some gold and silver with the stimulus money, I guess and get ready for the final crack up boom before war again realigns reality with the existing international monetary order.

http://dharmajoint.blogspot.com/2009/05/when-interests-collide.html

Energy, agriculture and metals moving to center stage

"The years ahead can be best described by the two Chinese symbols which when used together make the word danger; crisis and opportunity. Three trends will greatly influence investment considerations during the next decade; the current financial mess, agriculture, and energy. It is essential to understand how they are interconnected in order to position your portfolios to benefit. I must also note that of these three themes only the current financial mess has an immediate solution, and that solution is inflation.

Financial crisis.

The policy response of Central Banks to the current financial crisis has been money creation in order to generate inflation. Calls for deflation are abating as some begin to realize that these reflationary policies (inflation) are working. We don't even talk in terms of billions anymore, everything is in trillions. Germany understands the inflationary consequences of this policy, having suffered from hyperinflation twice in the last hundred years. Germany's response, which has been to begin to restrain both it's bail outs and money creation, is been followed by an increasing number of G20 nations also questioning the rational of current US policy. The US's biggest European supporter, the UK, is also being criticized in the European Parliament. Look up Daniel Hannan on You Tube and watch the "Devalued Prime Minister" to see how some European politicians feel about Gordon Brown's fiscal policy. At the same time we are starting to hear more chatter about the need for a lower $US; even the IMF has called for the consideration of a new basket of currencies to include gold for global trade. To top it off the US needs to borrow at least $US 5 Trillion this year, and this is highly unlikely without the printing press. The devaluation of the $US is inevitable as the US needs to inflate to keep up. Up to now the pundits on Wall Street and the media do not talk about the recent rise in hard assets because they are looking at the relative values of their own currencies, not noticing that all hard assets are rising in tandem against all currencies. Yes the $US might be high right now but they are all sinking in tandem; this just what I expected as we begin to witness the transfer from paper assets to hard assets, an exact replay of what has historically taken place. Like the lack of movement noticed when all vehicles move forward at the same time, the rise of hard assets since October has been almost unnoticed; gold is up 32% since it's October lows of $681, WTI is up 41% from it's December low of $35.13, and it's the same story with the grains. Going forward I expect that this rise will become more noticeable as currency values start to diverge between the fiscally prudent, hard asset based, and economically viable ones. This is just being witnessed by the resent rise in the $Cdn, $Aus, Brazilian Real, and others."

http://www.financialsense.com/Market/carrasco/2009/0422.html

Commodity outlook bullish on Inflation /1935-1945 record

Puru Saxena makes the case......


Today, there are many deflationists who are claiming that the prices will remain depressed for many years due to the weak economic activity. However, these folks should note that even during the Great Depression of the 1930's, prices of commodities stabilised and began rising in 1933. Figure 1 confirms that due to monetary inflation in the early 1930's, the CRB Index embarked on a secular bull-market which had a violent correction in 1937 (marked by purple arrow). Following that crash, commodities bottomed out in 1938 and thanks to the super-inflationary efforts of President Roosevelt, the CRB Index surged for more than a decade.

Figure 1: CRB Spot Index - (1930-2007)



Source: Commodities Research Bureau

Contrary to popular opinion, that huge commodities boom took place despite an economic depression. Furthermore, it is worth pointing out that commodities rose relentlessly despite the fact that private-sector debt and bank lending remained essentially flat until 1945. Back then, similar to the current situation, banks accumulated large reserves but didn't loan these reserves into the broad economy. However, from 1932 onwards, the US government borrowed so much new money into existence that prices began to rise way before private-sector credit started to expand.

A similar drama unfolded in the 1970's when commodities went through the roof. During that time, economic activity was dismal but governments decided to tackle the recession with money creation. The net result was surging hard asset prices and mind-numbing inflation!

Turning to the present situation, US private-sector debt is shrinking as banks remain fearful of lending. However, the US government (along with other nations) is borrowing and creating gigantic sums of money and this should cause prices to rise for the next 3-4 years. Accordingly, we are maintaining our positions in top-quality businesses in the resources sector.

http://www.safehaven.com/article-13104.htm

Inflation Will Be A Surprise

Earlier this week, the Labor Department reported declines in both the Producer Price Index (PPI) and the Consumer Price Index (CPI). Various economists and television commentators believe that these declines are proof that slack in the economy is creating deflation and more than offsetting the inflationary impacts of government stimulus spending and money-printing by the Federal Reserve.

A deeper look at the CPI report shows a different picture:


Source: Department of Labor

The far right-hand column shows that the "All items" CPI headline data declined 0.4% over the past twelve months. This figure is what the deflationists are citing as evidence of deflation. However, the "All items less food and energy" figure rose 1.8%. The whopping 23% decline in energy led to the overall decline in prices or "deflation" that economists cite. It is worth nothing that it took a 23% drop in energy prices to create a 0.4% decline in CPI when energy prices are still so high compared to the last couple of decades.

Prices in the broader economy are not falling despite the worst recession since the 1930's because of the government's programs and the mind-boggling increase in the Federal Reserve's balance sheet. Velocity of money (spending and business transactions) has slowed due to the weakness in the economy. However, as reflected in the chart below, holdings of cash are exploding. As people in the deflation camp alter their deflationary forecasts, holders of cash will rightfully become nervous about their loss of purchasing power. As a result, the velocity of money will rise despite the weak economy - a theme quite common for highly indebted countries. To believe that there is deflation today and to assume it will continue into the future is to misunderstand the definition of inflation.





Market dislocations occur at major turning points when markets falsely forecast the path of inflation versus deflation. For example, in 1982 the market was incorrectly fearful of inflation, which meant stock and bond prices were quite low and provided for outstanding gains if the inflation fear was unfounded. As is now known, inflation had ended and thus it was a great time to buy stocks and bonds.

Today, the market is counting on deflation. As a result, gold is undervalued and US stocks and bonds are overvalued because the market believes deflation will persist until only mild inflation replaces it. As Peter Schiff says, "A little inflation is like being a little pregnant." Stock P/E's contract and interest rates rise during high inflation. As reflected in the chart above there is a huge amount of cash on the sidelines. When fear of deflation subsides and the harsh reality of inflation sets in, cash will flow to commodities and hard assets and thus lead to higher consumer prices rather than higher stock prices (until we have hyperinflation, which clearly is not on the market's mind).

In summary, stocks are rallying and investors believe in deflation. As of March 2009, the CPI is helping to inflate the deflation story. However, at some point, markets will either begin to discount that CPI will turn higher or there will be a rude awakening when the data is released. Either way, inflation will be a surprise because the markets are incorrectly discounting the future.

http://www.safehaven.com/article-13111.htm

The perils of printing money ~ none, it worked for Zimbabwe

Many major central banks around the world have now spent all their bullets in lowering official interest rates, yet their economies still founder.

Quantitative easing (QE) is now being seen as a last hope for governments in the US, Japan, Britain and Europe to prevent the onset of possible depression following the global economic crisis.

In a nutshell, QE involves central banks printing money to purchase a range of assets from the market. Typically these are government and mortgage bonds. The US and others are, on the one hand, financing their fiscal deficits by issuing bonds to the market, yet on the other hand are supersizing their balance sheets by buying back these and other securities with electronically created money.

If this sounds crazy then you understand the situation. QE advocates say that money supply in the economy is increased which should allow easier borrowing to purchase assets like property. This in turn is designed to halt deflation and raise prices.

But what happens when the party is over? Governments can't print money and buy bonds forever.

The resulting situation is one of a bond market bubble where yields are artificially low and governments are the only major buyers. Investors will stay out of the market, in fear of losses on these bonds when the QE buying program ends. Long-term rates then rise rapidly just as economic recovery is emerging.

This practice is almost as crazy as the whole multi-layer of leverage created in the first place when the US Federal Reserve held rates at just 1 per cent for far too long and produced the great property bubble of the early 2000s. Perversely, it will once again be government policy that spawns this mess.

Credit goes to governments for supporting the global financial markets and guaranteeing bank deposits. Safeguarding the integrity of the financial system is paramount to a free and law-abiding society. Credit also for establishing programs to relieve banks of toxic assets so that they may get back to good old-fashioned money lending. Future re-regulation of the banking system will prevent many of the unfortunate aspects of runaway capitalism from returning.

That said, the practice of widespread QE implementation is fraught with folly and may get us into a situation just as dire as the one we are currently in.

Clearly central banks consider the downside of QE (surging inflation and rapidly rising borrowing costs) a far more fixable problem than what we are currently in, using traditional monetary policy measures.

So why go from one disaster to another or bust to boom and back again when we have the opportunity to get things sorted in this current downturn? Clearly the world needed to deleverage and many bad industries and enterprises had to consolidate by either merging, rationalising or bankruptcy. It is likely we have already suffered the majority of the pain. The US car makers will emerge much greener and more globally competitive. Many weak banks have already fallen or been consumed by the large. The huge discount in many stocks will open the door for investors to prudently rebuild their portfolios.

There has already been massive government fiscal stimulus, record low rates and huge equity injections into the private sector … maybe, just maybe it is time to step back a little and see what happens from the sidelines without authorities thinking they need to continue to coach from the middle of the pitch with untested and possibly dangerous policies.

Closer to home, the Reserve Bank has wisely lowered its benchmark rate to 3 per cent to support the economy yet still has ammunition to do more. It believes a combination of historically low rates and fiscal stimulus will be enough to see Australia through the storm. Luckily for us, an extremely solid economic foundation built up over the past 15 years should mean that QE never gets into the minutes of RBA policy.

Then there is the folly of blanket hand-outs. Surely they should be saved. The Rudd Government is wrong to be giving huge incentives for the public to go out and leverage themselves again in this economic environment. Did excessive leverage not cause the problem in the first place?

Neale Muston, the former managing director of fixed income at Morgan Stanley Australia, now runs a global markets trading business in Sydney.

Source: The Sydney Morning Herald
http://business.brisbanetimes.com.au/business/the-perils-of-printing-money-20090410-a2v4.html

There is More Where this Gift has Come From ~ Antal E. Fekete

On Wednesday, March 18, another handsome gift was delivered by the Fed to the bond bulls. It was the announcement that the Open Market Committee has made a unanimous decision for the central bank to buy $300 billion in long-term Treasury bonds and notes over the next six-month period. The yield on the 30-year Treasury bond immediately fell from 3.8% to 3.5%, while the yield on the benchmark 10-year Treasury note fell more: from 3% to 2.53%, increasing the price of the note by 42/32 from 9726/32 to 10128/32 , the biggest one-day rise in years. The gift of risk-free profits is granted to the bond bulls through courtesy of the Fed, in telling them in advance about its intention of buying long-dated government debt.

Note that in the past Fed purchases of long-term Treasurys have been exceedingly rare. The last time the Fed resorted to it was in 1959. But half-a-century ago it was not meant to be a permanent fixture of monetary policy. This time is different. Wednesday’s announcement is the opening salvo in a brand new game of serial interest-rate cuts in the high-end of the yield-curve now that the Fed has chewed up the low end. It has used up all its ammunition in the short-term T-bill market where the rate is only microscopically greater than zero, rendering the Fed helpless and impotent. A new bag of tricks is coming into play: the monetization of long-term government debt. The market tells it all. The dollar index fell 3%, the biggest drop in more than two decades.

Actually, as I have suggested in several earlier articles, ‘serial cutting of interest rates’ is a misnomer. The correct phrase is ‘serial halving of interest rates’. The nuance is important. Serial cutting comes to an end when you have cut it to the bare bones: all the way back to zero. Not so serial halving that can be fine-tuned like water-torture. It can continue indefinitely, while each halving causes the same devastation in the economic landscape as it doubles the liquidation value of total debt.
Central banks in Japan and the United Kingdom have announced similar monetary policies. The Bank of Japan has said that it will increase its volume of bond purchases by 30%. According to Mr. Shiraskawa, the governor of the bank, “bond purchases are not intended to finance the Japanese government’s spending. That would be too dangerous.” Who is the governor kidding? As long as the Japanese government spends more than its revenue from taxes, every act of buying a government bond is an act of financing the government. Even in Switzerland, the paragon of monetary and fiscal rectitude, where the Swiss National Bank is hard put to find a government bond it can buy, they have to do something to enter the mad race to find out which country can increase the money supply at the fastest rate. The Swiss are resourceful: since they cannot increase the money supply through purchases of bonds, they will increase it through sales of Swiss francs. All masks are off. The Swiss will not let others outbid them in the game of bidding down the value of national currencies around the globe. This is competitive currency debasement at its most vicious. It is a cover-up for the underlying trade war.

Why should we worry about a monetary policy that depends on risk-free profits offered to speculators betting on higher bond values? Because it reflects the utter corruption of the profit-and-loss system on which capitalist production is based. It makes the businessman appear foolish who takes risks in the producing sector while trying to satisfy the needs of the consumers – when risk-free profits are available in the financial sector. As a matter of fact, the risk-free profits of the bond bulls do not come out of nowhere. They come right out of the capital accounts of the producers. These gains are the flipside of the capital losses suffered by the real risk-takers, the sitting ducks in this shoot-out.

I have been in a minority of one in my quest to inform the public about the single cause of the present economic disaster. In fact I have been predicting it for the past eight years. The single cause is the Fed’s deliberate policy to drive down interest rates through serial halving. This policy is animated by the economic theories of John Maynard Keynes, according to which interest ought to be abolished so that the stone can be turned into bread and water into wine. The miracle is worked by a central bank well-equipped with printing presses and a factory to produce green cheese in unlimited quantities, to shove it down the throats of savers who are trying to provide for their twilight years, or for the education of their offspring, or just for a rainy day.
Continuing or even accelerating that disastrous monetary policy of unlimited green cheese production will not alleviate the crisis. It will make it worse. Much worse.
Look at it this way. The present contraction of the world economy is not due to a glut in global savings for which businessmen can find no good use, and which consequently has to be mopped up through expanding the balance sheet of the central banks all over the world, as “explained” by Paul Krugman and his friend, mentor, and former boss Ben Bernanke. The contraction is due to the lethargy of businessmen who see their past investments turn sour one after another at each interest-rate cut. Businessmen will not make new investments, no matter how badly central bankers want to force-feed them at the trough of newly created money, as long as the mad driving-down of interest rates continues. Would you buy a car today if you were told that its price will be cut tomorrow? Of course you wouldn’t. Well, it is the same with businessmen. They would not make an investment today if they were told that tomorrow they could finance it at a cheaper rate and, the day after tomorrow at a rate cheaper still. It is as simple as that.

Now the Fed is saying that it has got a new toy-grenade to try on the economy: the T-bond purchase plan. Businessmen conclude that this is time to go into hibernation-mode. They just want to survive with their remaining capital intact until this madness runs its full course. They will come back and start investing again in saner times, when interest rates are stabilized at their natural level. Those who listen to the siren song from the Fed and other central banks, and invest at today’s teaser-rate will get massacred at the next halving, when even lower teaser rates will be offered.

What we are witnessing is the closing of Keynes’ system. This system is based on the worst fallacy ever embraced by pretenders and impostors in science: the fallacy, inspired by Karl Marx, of over-saving and under-consumption. It was under this banner that the Fed introduced its illegal policy of open market purchases of government bonds that would be legalized retroactively later. But with this coup d’etat the Fed shot itself in the foot. It has forgotten to take the reaction of bond speculators into account. Of course, speculators would not sit idly by when they are told that, as a matter of high monetary policy, the Fed will have to make periodic trips to the bond market to purchase its quota of government bonds. Of course speculators would want to pre-empt the Fed. Of course they wanted to buy first so that they could dump their bonds on the Fed at a profit later. Of course bond speculators would lie in wait for the Fed and ambush it at the moment it was ready to pick up its next quota of government bonds in the open market.
The present monetary system promises risk-free profits to bond speculators. This guarantees that the interest rate structure will keep falling indefinitely. Astute businessmen who understand the interaction between finance and production will stay on the sidelines. They will not join the mad tea party of teaser rates whether offered in the subprime mortgage market or whether offered on loans to finance future production. Teaser rates are there to tempt individuals and businesses to commit hara-kiri. This raises the question just how sound a monetary system is that wants to create money, lots of it, but can only do it through bribes and blackmails. This also raises the question how it is possible to treat Keynes’ system with respect.
Mine is a cry in the wilderness. You had thought that the political system was rotten as it was a system of bribes, blackmails, and vote-buying facilitated by irredeemable currency. You had thought that the judiciary was rotten as no complaint about the fraud involved in the check-kiting conspiracy between the Treasury and the Fed would ever be heard in a court. You had thought that victims of the Ponzi-scheme whereby the government would sell bonds, which it had neither the means nor the intention to pay off, could have their day in court.
But look: the educational system, our only hope for the future, is equally rotten. Its faculties of criticism are so badly disabled that one can no longer hope for an open discussion of burning issues. Keynesians, in concert with their Friedmanite comrades, control everything: monetary policy, fiscal policy, the judiciary, appointments and the research agenda at universities and other think-tanks, the publication programs in the editorial offices of scholarly journals. A Cassandra such as myself would never get a hearing before the disaster struck.

Now, as it turns out, I won’t get a hearing even after disaster has struck. Keynesians and their Friedmanite cronies want to control the rescue effort and they certainly do not want to see their past errors and misdeeds, that lie at the root of the problem, exposed to public scrutiny.

The economic and financial crisis that is plaguing the world is extremely serious. Damage to the social fabric could be even greater than that during the Great Depression. But a reasoned, high-level discussion on the genesis of the crisis is ruled out. You have to buy the official crap on the global savings glut. You are not allowed to challenge the official dogma of under-consumption even after the most wasteful episode of over-consumption in history, running up private and public debt to stratospheric heights.
The present crisis is about past, present, and future destruction of capital due to the Keynesians’ deliberate policy of driving down interest rates. Education of public opinion about these matters is sorely needed. Keynesians have been successful in convincing the public that their monetary policy to drive down interest rates is a blessing. But the truth is that falling interest rates erode capital, because the return from earlier investments proves insufficient to amortize debt contracted at higher rates. At the end of the capital erosion road comes the realization that production and finance stands bereft of any capital. The result is a credit collapse that can no longer be covered up with the usual Keynesian nostrums.
My conclusion is that the latest move of the Fed is going to entrench deflation through entrenching the trend of falling interest rates. The mechanism works through bond speculation, making risk-free capital gains available to speculators, who will then bid up bond prices unopposed to any high level.
Other observers may violently disagree with this view. For example Clive Maund had this to say: “So Treasuries spiked yesterday [on March 18], but the large gains were almost entirely erased by the drop in the dollar… So in an environment where the Fed and the Treasury are going to have to create dollars, i.e., to dilute the currency, to prop up financial instruments… who but a complete imbecile is going to buy them?… The Treasury market will collapse in due course anyway despite, and perhaps even because of, the Fed’s desperate and reckless attempts to backstop it.”
Not so fast, please. Ultimately the market for Treasury bonds will collapse in a hyper-inflationary scenario, but this may be years down the road. In the meantime we have to face the music that keeps the game of musical chairs going: the serial halving of interest rates to enable bond speculators to earn risk-free profits. This stokes the fires of deflation, not the fires of inflation. Obituaries of the dollar are written prematurely. The death throes of the Dollar Almighty, as the U.S. currency was known not so long ago, will continue for quite a while yet and, unfortunately, will cause a lot more damage to the world economy, and a lot more economic pain to ordinary people.

It is an inane and malicious Keynesian propaganda that falling interest rates are good for the economy, for you, for me, for business. On the contrary, they are lethal. Only low and stable interest rates can help us to get out of the present mess – an unachievable goal under the regime of irredeemable currency.

Roadmap To Inflation And Sources Of Cheap Insurance

by James Montier

As Albert and I regularly point out during meetings, we have never been more unsure on the inflation/deflation outlook. I have previously said I was torn between the deflationary impact of the bursting credit bubble, and the inflationary pressures of the policy response. When we read something by the deflationists we sit there nodding our heads in agreement, then we pick up something by the proponents of a return of inflation and we find ourselves agreeing with that as well. The respective sides seem deeply entrenched in their positions.

In contrast, we are trying to keep an open mind on the subject. Albert is biased towards a Japanese style outcome, and I am biased towards an inflationary outcome, but neither of us has any strong conviction.
Fisher and the debt-deflation theory of depressions

In the face of this uncertainty I decided to return to history and see what it has to say about the way out of a depression. My first point of call was Irving Fisher's "The debt-deflation theory of Great Depressions" published in 19331. Fisher is probably most infamous to those in finance for his pronouncements of a new era of permanently high stock prices in 1929. But in the wake of his disastrous calls he turned to trying to understand the experience of the depression. Incidentally, he also invented the Rolodex.

In his debt-deflation theory, he posits "two dominant factors" in driving depressions "Namely over-indebtedness to start with and deflation following soon after... In short, the big bad actors are debt disturbances and price-level disturbances". He continues "Deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed." That is to say, debt-deflation spirals can easily become self-reinforcing.

The good news is that Fisher is also very clear on how to end a debt-deflation spiral: "It is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors... I would emphasize... that great depressions are curable and preventable through reflation and stabilization". The irony of Fisher's route out of deflation is that, probably only the Fed - after helping lead us into this mess2 - can now get us out of it.
Romer's lessons from the Great Depression

After reading Fisher's analysis of the 1930s, I came across a recent speech given by Christina Romer, who is now the head of the Council of Economic Advisers, and who made her name in academic circles studying the events which ended the Great Depression. In the speech, Romer offers six lessons from the Great depression for the current juncture.

Lesson 1 – Small fiscal expansion has only small effects

Romer wrote a paper in 19923 arguing that fiscal policy was not the key driver in the recovery from the Great Depression. Not because fiscal expansion is ineffectual per se, but rather because the fiscal stimulus that was conducted wasn't large. As Romer notes "When Roosevelt took office in 1933, real GDP was more than 30% below its normal trend level... The deficit rose by about one and a half percent of GDP in 1934".

Lesson 2 – Monetary expansion can help heal an economy even when interest rates are near zero

Romer notes that actually it was the Treasury rather than the Federal Reserve that drove the monetary expansion (a peculiarity of the system under the Gold Standard). In April 1933, Roosevelt suspended convertibility to gold on a temporary basis, and the dollar depreciated. When the US returned to gold at the new higher price, gold flowed into the US, allowing the Treasury to issue gold certificates which were interchangeable with Federal Reserve notes. As Romer notes "The result was that the money supply, defined narrowly as currency and reserves, grew by nearly 17% per year between 1933 and 1936". Romer argues that this "Devaluation followed by rapid monetary expansion broke the deflationary spiral" - empirical evidence to support Fisher's hypothesis outlined above.

Lesson 3 – Beware of cutting back on stimulus too soon

The monetary expansion seems to have produced remarkable results in terms of real growth: the US economy grew by 11% in 1934, 9% in 1935 and 13% in 1936 in real terms. This lulled the authorities into thinking that all was well with the system again. Hence, in 1937, the deficit was reduced by approximately two and half percent of GDP. Monetary policy was also tightened, as Romer notes "The Federal Reserve doubled the reserve requirement in three steps in 1936 and 1937". She concludes "taking the wrong turn in 1937 effectively added two years to the Depression".

Lesson 4 – Financial recovery and real recovery go hand in hand

Romer points out the inseparable nature of the real and financial recoveries. This meshes with our analysis that the banks aren't really the problem in a debt-deflation environment, rather they are a symptom of the problem. The current policy in the US seems to be aimed at "fixing the financial system", witness Bernanke's recent comments "Recovery is not going to happen until the financial markets and the banks are stabilized". This appears to be a misperception, as, Romer notes "Strengthening the real economy improved the health of the financial system. Bank profits moved from large and negative in 1933 to large and positive in 1935, and remained high through the end of the Depression".

Investors seem to be rather excited about banks posting profits at the moment. Frankly, if a bank didn't post a profit in this environment it should be shot out of kindness. The environment for profitability from banks has rarely been better, but that doesn't make them solvent. If you were starting a business today, then setting up a bank would be a very attractive option. However, history - as represented by the balance sheet - cannot simply be ignored when it is inconvenient. As John Hussman noted "The excitement of investors last week about Citigroup posting an operating profit in the first two months of the year simply indicates that investors may not fully understand the term "operating profit." Citigroup could burst into flames while Vikram Pandit sells lemonade in the parking lot, and Citi would still post an operating profit. Operating profits exclude what happens on the balance sheet."

Lesson 5 – Worldwide expansionary policy shares the burdens

Given the worldwide nature of the current slump, Romer makes an interesting point on the effectiveness of competitive devaluations, "Going off the gold standard and increasing the domestic money supply was a key factor in generating recovery... across a wide range of countries in the 1930s... These actions worked to lower world [real] interest rates... rather than just to shift expansion from one country to another".

This is something that Albert and I have been discussing of late. We have been pondering the possibility of competitive devaluation (obviously ultimately a zero sum game in terms of exchange rates) having enough of an impact on local monetary creation to increase inflationary expectations, thus helping countries reflate. It appears as if Romer has sympathy with this view.

Lesson 6 – The Great Depression did eventually end

The final lesson that Romer offers may be of use to investors at the current juncture. She makes the point that the Great Depression did finally end. As Romer puts it "Despite the devastating loss of wealth, chaos in our financial markets, and a loss of confidence so great that it nearly destroyed American's fundamental faith in capitalism, the economy came back. Indeed, the growth between 1933 and 1937 was the highest we have ever experienced outside of wartime. Had the U.S. not had the terrible policy-induced setback in 1937, we, like most other countries... would probably have been fully recovered before the outbreak of World War II" This is a reminder that the current obsession with no scenario being too pessimistic is probably ill advised.


Bernanke and the policy options

The final source for signposts to watch comes from a speech given by Bernanke in 2000 to Japanese policy makers. As I wrote in Mind Matters 6 January 2009, in this speech Bernanke clearly acknowledged the greater threat that deflation poses in a highly leveraged economy, "Zero inflation or mild deflation is potentially more dangerous in the modern environment than it was, say, in the classical gold standard era. The modern economy makes much heavier use of credit, especially longer-term credit, than the economies of the nineteenth century."

Bernanke clearly believes that monetary policy is far from impotent at the zero interest rate bound. In essence his argument is an arbitrage based4 one as follows "Money, unlike other forms of government debt, pays zero interest and has infinite maturity. The monetary authorities can issue as much money as they like. Hence, if the price level were truly independent of money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero."

In the speech, he laid out a menu of policy options that are available to the monetary authorities at the zero bound. First, aggressive currency depreciation, as per Romer's analysis of the end of the Great Depression. Second on Bernanke's list is the introduction of an inflation target to help mould the public's expectations about the central bank's desire for inflation. He mentions the range of 3-4%!

Third on the list was money financed transfers. Essentially tax cuts financed by printing money. Obviously this requires co-ordination between the monetary and fiscal authorities, but this should be less of an issue in the US than it was in Japan. Finally, Bernanke argues that non-standard monetary policy should be deployed. Effectively, quantitative and qualitative easing. Bernanke has repeatedly mentioned the possibility of outright purchases of government bonds - as the UK is now doing.

This menu should provide us with a roadmap of policy options to watch for. If (and when) the deflationary pressure builds, we should expect to see more and more of these options wheeled out. Note that we aren't talking about trying to 'fix the system', to reflate the bubble (which would be the equivalent of giving crack cocaine to a heroin addict trying to deal with withdrawal). Rather, the suggestion from Fisher is that inflation erodes the real value of debt; it is the most painless way out of our current mess. Whether the authorities can create just a little inflation remains to be seen, as does their ability to actually create inflation in any way. Such imponderables are beyond my ken.
Investment implications – Cheap insurance

Howard Marks recently suggested that today's investment decisions must focus on "value, survivability and staying power". These factors lie at the heart of the three-pronged approach that I have been suggesting since the end of October last year.

The first prong is cash. This is a legacy from the lack of opportunities that characterised markets in the last few years. But it is also a hedge against outright deflation. The second prong is deep value opportunities in both debt and equity markets (as detailed for the equity markets most recently in Mind Matters, 4 March 2009). The third element is sources of cheap insurance. The idea behind this element of the portfolio is to prepare for a wide variety of outcomes by buying cheap insurance (which ideally, although not always, pays off in multiple states of the world). Of course, it should be noted that the purchase of cheap equities also contains an inflation hedge element.

Inflation/deflation insurance I – TIPS

The first and most obvious source of inflation/deflation protection when I first started thinking about this subject was US TIPS. These bonds have a deflation floor on the principal, so in the event of deflation I receive my cash back - representing a real rate of return equivalent to whatever the deflation rate is. In the event of inflation, I get whatever the yield is on the TIPS when I purchase them plus the inflation, of course (buying the new issue TIPS avoids the problem of accrued inflation).

When I started looking at TIPS, the yield was over 3.5%. This has dropped since then, resulting in the 10 year TIPS delivering a 9% return since the end of October. The 10 year TIP is currently yielding 2.1%, against the 10 year nominal bond yield of 3%. This implies that the market expects US inflation to be a mere 1% p.a. over the next decade - this strikes me as an exceptionally low rate.



Inflation/deflation insurance II – Gold

The second inflation/deflation hedge I suggested in late October was gold. Now, gold concerns me for a variety of reasons, not least of which is that it has no intrinsic worth: I can't really value gold - beyond extraction cost.

However, it has some attractive features from an insurance point of view. Most obviously, in a world of competitive devaluations, gold is the one currency that can't be debased. Thus it provides a useful hedge against the return of this sort of beggar-thy-neighbour policy. In the event of significant prolonged deflation, what is left of our financial system is likely to collapse, thus holding a money substitute isn't such a bad idea against this cataclysmic outcome.

Of course, recently everyone has been talking about gold (not hugely surprising given that it is up some 30% since late October) - something that makes me nervous. However, gold is institutionally massively under-owned, so whilst it may have been moving up the list of attractive assets of individual investors (if the EFTs are anything to go by) and sensible hedge funds (such as the likes of Greenlight, Paulson, Third Point, Eton Park and Hayman), the mainstream institutional appetite for it has remained depressed.



Inflation insurance I – Dividend swaps

As we noted in Mind Matters, 2 February 2009 the European and UK dividend swap markets are pricing in an outcome that implies greater dividend declines than witnessed in the US during the Great Depression. The pricing then implies that essentially the dividends won't recover, pretty much forever. This strikes me as excessively pessimistic.

In addition, dividends have a relatively close relationship with inflation (as detailed in the aforementioned Mind Matters). Thus dividend swaps look like a deeply distressed asset fire sale, with the added advantage of offering inflation insurance if I buy the longer dated swaps (up around 7% from my original note in February). The most common rebuttal to my fondness for dividend swaps is counterparty risk. However, the European dividend swaps have an exchange listed future, which obviously doesn't have any counterparty issues.



Inflation insurance II – Inflation swaps

The second of the pure inflation hedges comes via the inflation swap market. The charts below show the zero-coupon fixed rate necessary to build a swap against zero-coupon CPI appreciation over 10 years. When I first looked at the US version in January (see Mind Matters, 6 January 2009) the rate was a mere 1.5%. Today it has risen, although not dramatically, to 2.3%.

However, the cheapest inflation swaps in the world seem to be Japanese swaps. They are available for -2.5%! Both the US and Japanese inflation swaps strike me as cheap ways of buying inflation insurance at the moment. Although counterparty risk is obviously a significant factor in these long duration swap transactions.







Eurozone break-up insurance: Spanish and Portuguese CDS

The final element of the insurance policy concerns the risk of a euro break-up. In a world of competitive devaluation, it isn't clear that the Eurozone will be able to stand the pressure. The one area of the world which has anything like the gold standard in place is the Eurozone. As Albert opines during our meetings with clients, this is less a function of economic realities and more a function of political expediency (I'll leave a detailed exposition of this logic to Albert in a future note).

To protect against this risk (or even rising perceptions of this risk) the natural insurance is provided by the CDS market. If even one country was to publicly contemplate leaving the Eurozone then these CDS spreads would explode. I find it hard to believe that Portuguese and Spanish CDS are below those of the UK - where we have the ability (and have used it) to print our own money.



Footnotes:

1 Available from http://www.fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf This is one of few articles published in Econometrica that I have ever read!

2 See Bill Flecksenstein's excellent book, Greenspan's Bubbles or John Taylor's insightful paper The Financial Crisis and the Policy Responses: An empirical analysis of what went wrong, available from http://www.stanford.edu?~johntayl/FCPR.pdf, or any of Albert Edwards' myriad of rants on Greenspan.

3 Romer (1992) What ended the Great Depression?, The Journal of Economic History, Vol 52

4 As Stephen Ross once said, to turn a parrot into a learned financial economist it needs learn just one word: arbitrage. To my mind economists are far too happy to rely on arbitrage assumptions to rule out solutions. Indeed the second chapter of my first book, Behavioural Finance is spent detailing failures of arbitrage (both causes and consequences thereof, including the ketchup markets!).

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NYT on the road to Weimar~ Fed to Buy $1 Trillion in Securities to Aid Economy

WASHINGTON — Saying that the recession continues to deepen, the Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the mortgage market and longer-term Treasury securities in order to revive the economy.

“Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending,” the Fed said, adding that it would “employ all available tools to promote economic recovery and to preserve price stability.”

As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

Indeed, the immediate effect on the bond markets was striking, with prices rising and yields dropping sharply on the news. The yield on the 30-year Treasury bond, about 3.75 percent before the announcement, fell quickly to 3.4 percent and remained volatile. At the same time, the dollar plunged about 3 percent against other major currencies.

Stocks moved higher on the Fed action. The Dow Jones industrial average was down about 50 points before the 2:15 p.m. announcement, but ended the day up about 90 points.

The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on loans of all types.

All of the Fed’s measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. Since last September, the central bank has roughly doubled the size of its balance sheet to nearly $2 trillion from $900 billion — even before Wednesday’s action — mainly because of its efforts to rescue credit markets.

Despite a trickle of encouraging economic data in the last few weeks, Fed officials were clearly unimpressed and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in December, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment that could approach 9 percent by the end of the year and that there was at least a small risk of an across-the-board drop in consumer prices akin to what Japan experienced for nearly a decade.

Hours before the Fed announced its decision on Wednesday, the Labor Department reported that consumer prices climbed 0.4 percent in January, the second consecutive monthly increase. The news provided some relief from deflation worries, but most analysts still expect prices to remain nearly flat for the foreseeable future. In their most recent forecast, Fed policy makers predicted that consumer prices would rise 0.3 to 1 percent this year — well below the central bank’s unofficial inflation target of nearly 2 percent.

The Federal Reserve slashed its benchmark interest rate to virtually zero in December, declaring that it would keep the rate at that level for “some time” and focusing its additional efforts to revive the economy on a wide range of new lending programs.

In a sign that it is even more worried than at its last meeting in January, the Fed said on Wednesday that it would keep its benchmark rate, the federal funds rate, at virtually zero for “an extended period.” While the central bank had said for some time that it was considering the possibility of buying longer-term Treasury bonds, Fed officials had played down that idea in the past month as they focused their attention instead on more targeted intervention in the credit markets.

In their statement on Wednesday, however, the Fed policy makers offered little explanation for the decision to go ahead with the Treasury purchases after all, saying only that the move was intended to “improve conditions in private credit markets.”

Since last September, new lending programs — including money for bailouts of individual companies like Citigroup, American International Group and Bank of America — have caused the Fed to print new money at the fastest pace in history. But much of that money has remained dormant, because the economic downturn has made banks reluctant to lend and businesses and consumers either reluctant or unable to borrow.

The Fed and the Treasury are in the process this week of starting a joint venture called the Consumer and Business Lending Initiative in their latest effort to revive the still-frozen credit markets. The program, also known as the Term Asset-Backed Securities Loan Facility, or TALF, will start out by offering $200 billion worth of financing for consumer loans, small business loans and some corporate purposes like equipment leasing.

Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.

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Inflation tide is just getting started

March 6, 2009

"Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation."

— Berkshire Hathaway 2008 annual report

Last week was a very good week due to the signals given by the market. It was the first time in a long time that the price of oil increased (17%) at the same time that the S&P 500 declined due to more talk of the nationalization of US banks. The thirty year US Treasury Bond decreased bringing yields up to 3.72% from a low of 2.65% in December, leading me to wonder if global investors are waking up to the US’s ability to pay back these mounting liabilities? Lastly, the decline in the price of gold and gold stocks might be signaling some level of rotation within the inflation hedges.

These changes in trend are particularly important because I am convinced that the market is set-up for a very good rebound, as some of the reflationary efforts of the Fed should start to have some effect. If I am correct, within the next few weeks we should see signs of market strength and the beginning of a pretty good rally in the context of a bear market. If this is the case, it is very encouraging to see the oil sector leading the way. As Warren Buffet said to his shareholders “an onslaught of inflation” is rearing it’s head and the market is chasing the most undervalued inflation protection in the market, the energy sector.

I was also very encouraged by the actions taken by Chinese Officials during US Secretary Clinton’s recent visit to China. Her mission was to advise the Chinese on the importance of the value of their US$ and Treasury holdings, and that it was in their joint benefit not to sell them. However the Chinese signaled the importance of Energy Security for their own strategic benefit. On the day of her arrival they signed a deal with the Russians to buy oil at $73 a barrel for the next twenty years, in essence giving Gasprom a much needed $25 Billion lifeline, this was too bad for Citigroup who also needs it. Upon her departure they further announced that they are on the acquisition mode for global oil companies. This is in addition to the US$1.7 billion China Minmetals Corp bid for Rio Tinto, and the US$10 billion deal with Petrobras to help fund the development of Brazil’s massive oil reserves. The smart money is understanding the importance of Energy Security for the Chinese, who now sit with two trillion US dollars. It is impossible for the Chinese Government to attain it’s long term goals without Energy Security, and the current reality of global oil reserves makes it a given that control is essential. Furthermore, Abu Dhabi’s purchase of Nova Chemicals and Total’s purchase of UTS Energy are further confirmation that the world is waking up to the need to convert US dollars into real assets; this trend will only accelerate.

The move out of Treasury’s and gold was also very impressive because it is signaling early signs that the smart money is exiting the comfort zone of the safety trade. Many will begin to recognize that the market has currently corrected more than an expected recovery by year end warrants, and that some of the efforts of the Fed should start to take effect. Furthermore, the current negative environment has created an excessive number of short positions in the system that will soon need to be covered if the market starts to rise. Lastly I expect that due to the reflationary efforts of the Fed, next quarters economic numbers will show a deceleration of a worsening economy and give the bulls some much need it relief. Conditions are ripe for a good rally that could last anywhere from two months or longer. My opinion is that it will last much longer as the market is currently setup in a similar manner as 1928. Coming into 1928 the market had greatly declined led by the bad conditions of the banking sector due to their irrational exuberance with real estate. Furthermore, in a similar manner Hoover won the election in 1928 and entered office in March of 1929, and American’s where still reminiscent of the Roaring Twenties. By early 1929 the market started a wonderful ascent fuelled mostly by lax margin rules and cheap lending; this ascent climaxed in October of 1929. I think the current reflationary policies have asked much of American taxpayers without much reward. Therefore, it is very important for the new administration to encourage some level of hope by making people feel richer, the herd will believe it as it is to early for the final climax. Due to the decline in the housing marker this can only come from the stock market.

The flight out of the safety zone might also hurt gold stocks temporarily as we see some rotation out of gold. The relative undervaluation of oil producers versus gold producers merits much consideration by the rational investor, and many will recognize this trade. Furthermore, many who sought gold as safety will also consider locking in their gains and rotating some of their holdings to the overall market. If the market starts to strengthen during the next few weeks it will be the beginning of the reflationary efforts of the Fed. This is very likely since many investors still do not recognize the economic reality that awaits them and believe that the economy will begin to recover by year end. The smart money will recognize the importance of the fact that oil started this rally and the fact that it will be leading it. The next course of action will be to decide whether it is time to overweight the oil sector. I will be looking to re-enter gold after the market has taken traction, by then we should start to see the effects of supply destruction which will be the next fuel booster for the coming inflation.

Lastly I would like to mention that agriculture stocks have been gaining nicely since October 2008 with gains of about 35%. Investors who added the companies like Agrium or Potash Corp, or the Agribusiness ETFs Ceres or Claymore to their portfolios in October should continue to do well. Hopefully Agrium’s purchase of CF Industry goes through as it is very accretive for both companies. Furthermore the current drought in the Southern Hemisphere is catching up to North America where Governor Schwarzenegger is declaring water rationing for farmers in California, this will have serious implication for food prices. If you thought the food problems we had last summer had gone away think again, just this week the US Agriculture Department raised the alarm for higher food cost this summer.

It has been my contention since last fall that due to the level of money creation inflation is inevitable. I further speculated that the precious metals sector would take the lead in signaling the loss of purchasing power of currencies, followed by the agriculture sector, and then the oil sector. So far this course is playing out accordingly. It is important to understand that prior to a Tsunami the water recedes only to comeback with full force. My observations lead me to believe that the early tides of this massive inflationary Tsunami are coming in. The next period will be the last chance to inflation-proof your portfolio. If you do not yet believe in the inflation thesis raise cash during the next market bounce, otherwise reposition yourself to benefit from this paradigmatic transfer of wealth. My main investment thesis, inflation hedging, has not changed and I continue to recommend that clients have greater long term consideration in precious metals, agriculture, and energy. I would be very happy to discuss my conclusions and their implications for your net worth, please feel free to contact me.

I will doing the Market Call segment on Canada’s business channel BNN on Friday March 13th from 12:00 to 1:00 pm, feel free to call in.

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