Macro Polo

From Qbamco’s Paul Brodsky:

Macro Polo

The absence of meaningful negative market responses to debt ceiling dramas, Japanese inflation targeting, trillion dollar coins, and other odd and dubious politically-oriented market meddling seems to be sending reflexive signals back to capitals: all clear, continue self-destructing.

The markets seem not to care, knowing that central banks have their back. Money creation can suspend nominal economic contraction and ensure rising financial markets until something, (anything!), might stir the public’s imagination again and animal spirits. But while money can suspend animation, it is not and cannot replace real economic functioning. In fact, ongoing money creation is locking-in negative real economic growth and real returns in most financial assets. We think the best strategy for discretionary investors is to stay focused on the growing monetary mountain across the valley, and to not look down.

This piece seeks to place the current investment environment in economic, political and social perspective. The second Chukker may break new ground for many.

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A European friend recently suggested to us that madness has taken over American politics. True that. But it seems more likely that American politics is merely reflecting far greater and deeper social introspection. Americans seem to be in the process of sorting themselves into groups with shared social values. Why might this be? Perhaps it is because our money no longer allows us to measure our personal industry? What is my personal economic value to society when a Nobel Laureate thinks the effect of proclaiming a trillion dollar coin would be “benign”?

On the surface, Left and Right fringes have always seemed bipolar opposites in terms of their social sensibilities and views on the optimal role of government. However, it is obvious that in the current environment the fringes are infiltrating established parties with which each has historically been associated and, it seems, finding a hollow core — the parties are long of self-serving ambition and tactical expertise and short of worthwhile principles. In this, the Left and Right fringes have a lot in common. They share deep disappointment in the efficacy of government and they are increasingly agitated by their representation in it.

The response of centrist elected leaders has been to revert to what they know: to secure funding from special interests with deep pockets in return for implicit favors, and then to use the funds to create a fictional narrative to appeal to the masses. As time goes on the masses are learning their representatives are providing only basal representation; enough only to keep them on the team for the next election cycle. The sad reality is that this is actually working for elected officials and their backers, but at a cost of increasing popular self-worth and identity.

Governments in representative democracies are not providing representation and their policies resemble nothing close to economic problem solving. Rather, they seem to be the result of consultants’ cost/benefit analyses of political capital expended vs. …what, self-serving ambition? It may be working now but the political establishment should be very worried.

The rest of us, regardless of our past politics, should be very excited. Like an old married couple that can no longer talk past each other once the money runs out, competing political parties are discovering they cannot escape each other as their societies’ real wealth is diminishing. It seems they are almost to the point where they might have to begin to give a shine about the people they ostensibly serve. (Look for the reincarnation of Andrew Jackson in 2016 or 2020?)

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Discussions of fiscal cliffs and sovereign bailouts are political constructs that we think have less to do with secular macroeconomics than most observers believe. At the risk of seeming overly glib, such events have been inevitable flashpoints that had to emerge. They represent the decision surrounding debt default: should it be explicit (natural credit deterioration that demands sudden widespread austerity), or implicit (policy-administered inflation that demands the loss of perceived wealth)?

The former would demand politicians and policy makers step away and let organic market forces prevail. Debt would quickly be right-sized through massive defaults, nominal output levels would drop precipitously and there would be great social expense in the near term. The latter would maintain irreconcilable debt-to-real output levels at not-so-obvious near-term social expense in perpetuity until societies implode, their economic production uncompensated in real terms.

The political decision has been made several times over: do the latter, take a pass and let central banks de-lever private banks, transferring wealth to them from the public directly via transfer payments and indirectly, via inflation.

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To G7 leadership: it is time to shift the terms of the Monetary Empire before it destroys our cultures, both externally and from within.

There are no good data points in the modern era where all global economic participants simultaneously lost faith in a completely unreserved global monetary regime. It would not be in your best interests to test these logical limits and then have to start the system from scratch. But the economic sky does not have to fall and property does not have to be transferred if (when) the current monetary system converts to a more sustainable one. We would all wake up the next morning in our beds and go to work. All that would change is the numbers we place on our commerce and property would be far larger, and the amount we owe far smaller in comparison.

We urge readers, policy makers, political donors and, most importantly, global investors able to influence all of the above through capital allocation, to force central banks to devalue our currencies and peg them to sovereign gold, before it is too late. The money spent to date has yet to be created. Close the gap and let us all get back to work.

Full letter (pdf link)

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