If you listen to Ray Dalio of Bridgewater you could generally surmise that asset prices will rise as cash moves back into the market and exchanges itself for “things”. This would be bad for the bond market. But if you listen carefully Ray is essentially attempting to discount chaos theory. In other words, the small guy never wins at poker. Not to take anything away from his amazing track record, but on that particular issue (a balanced approach for small investors), Ray would be wrong. The vulnerability, if you ask Dave, is in the outlier now that the perception of a chaotic breakdown has passed but the truth is that the table stakes have greatly increased.
Notice how Ray says that gold specifically will be one of the places that the cash flows towards. This is particularly interesting to Dave because if interest rates rise much, then gold doesn’t appear very attractive in a traditional sense. If you have inflation, sure gold is a hedge against inflation, but the opportunity cost of being in gold as opposed to an interest bearing account paying say 4% is a big deterrent to gold investors in a market of rising interest rates. It would seem that Ray is suggesting that we can have asset inflation without having rising interest rates. If so, then why would people move out of bonds? I don’t think they would, being once burned twice shy, they would probably hold out even longer with their bonds further building up the potential energy behind the ultimate tsunami bond apocalypse. I realize Ray’s analysis has already addressed this, but his assumptions are based on rates of return for his clients, not preservation of capital a game that he has played to the hilt and won… so far.
Let’s take a minute and contrast Ray’s ideas against Alan Blinder’s ideas and get an up close look at what it’s like being trapped between a rock (say gold as a conscious metric for the value of the USD) and a hard place (significantly rising interest rates and the subsequent sovereign defaults). Blinder launched his new book tour salvo by suggesting that the Fed should pay negative interest rates on reserves so that banks are forced to make loans into the general marketplace thereby spurring economic growth and development.
From Jesse on strafing the lifeboats:
The Fed has been pussyfooting around the credibility trap of their own policy failures for quite some time. This is hard for an academic to do, because so much of their personal currency is based on ‘reputation’ and the back-scratchers club.
So now the hacks can argue with Alan Blinder, former Vice Chair of the Fed. They may disagree with his policy judgements, but they might find it harder to dismiss his argument with the usual ‘he doesn’t understand the banking system’ approach which they tend to use when they wish to silence dissent. I took quite a bit of flack for this on the economic blogs comment sections and was fairly disgusted by what looked like a disinformation campaign.
I am no great fan of Blinder, and his own rationalisation of the Fed’s actions and the bailout are disturbing. But I will use what I can get and he explodes at least one of the monetary myths that a number of people had questioned, only to be shoved aside. The actions of the Fed have been all about bailing out the Banks, and in their fear and greed the politicians have gone along with them, both in the US and in Europe.
Paying no interest, or even negative rates on reserves, makes some sense, in motivating the banks to not to sit on their cash and gamble with it in the markets, and prop up mismarked assets, but to find some productive uses for it.
My only concern is that in this currently corrupt system the failure to pay interest or to even charge a fee for it would drive even more ‘hot money’ into financial asset bubbles in the US and overseas rather than productive loans and real investments in support of growth and recovery and real wages. This is one of the great drawbacks of the repeal of Glass-Steagall.
And if these negative rates were applied to what is paid to individual savers and depositors, then that would be even more of a travesty that what is occurring today as prudence and honesty are penalized by policy originating from the monied interests and their public servants. This is a real concern given the lack of serious reform of the system.
It would be like strafing the lifeboats, which is something some financial engineers would do if given the opportunity and the motivation in support of their increasingly convoluted and self-serving policy errors.
The full article from Jesse:
Blinder’s article on the case for negative interest rates for Fortune/CNNMoney:
So, where does this leave us? You have a post-Euro crisis situation which is effectively a calm after the storm. You have some very tired and exhausted people who are tired of being depressed who just want something to celebrate whether it’s a Super Bowl, or buying a new handbag or the grand opening of the new government-backed Federal Credit Union that just opened down the street from Dave’s house next to the new CVS pharmacy. Yehaa! It’s a boom time!
Dave will admit that there’s a bit of a mini-boom going on that I have noticed in my recent outings. It’s not like a full-sized Cinnabon boom, it’s more like the mini-Cinnabons. It’s a mini-boom. Lots of $3 – $30 million projects. But Dave has noticed a pattern in every single one of those projects. They lack entrepreneurs. They all have some sort of indirect backing from a quasi-governmental industrial complex. Just like the shopping center with the new Federal Credit Union and the CVS. Can you really call those private businesses even though the brochure from the credit union says “Who owns the credit union? You do!”? Right. You get a $3 annual redemption for you credit union membership. Yehaa! We’re in recovery!
I noticed the county is expanding their bus fleet too last week. It’s not a private bus company. It’s some arm of the county and they’re touting the new bigger buses. One of the buses pulled up next to me the other day and I couldn’t help but notice the emblem on the door to the bus that said “This program funded by Recovery.gov.” You get the idea. It’s not real economic growth. It’s some sort of quasi-governmental fascist friends-of-the-county-manager business model that is a substitute for what Blinder describes as genuine growth. It’s like that article in the local newspaper last year where they actually described the construction of a new $7 million detention center (read county jail house) as an, and I quote, “economic engine.” In our county, basically there’s one poor neighborhood where they arrest kids for selling crack cocaine and then the government makes millions locking these kids up for years.
I’ll never forget what a soap salesman told me about that detention center. He said it’s his biggest cash cow. I’m involved in a food business and we buy soap from Ecolab. The salesman told me that every kid in that detention center has to shower everyday with his soap, wash their hair with his shampoo and wash their hands three times per day with his hand soap. He said; “Do you have any idea how much soap that is?” I know how much it costs because I see the Ecolab bills and I also follow Ecolab stock which has nearly doubled in the past four years. Yeehaa! Recovery!
So which is it going to be? Negative interest rates on Grandma’s certificate of deposit to punish her for making a deposit at the local Federal Credit Union (by the way, their rates are a tad better than the non-federally subsidized version… if you can call a bank non-subsidized) or Dalio’s rising asset tide will lift all life boats as long as you maintain a balanced lifeboat portfolio and don’t go rogue and try to bet against the house. Remember Dalio got his first $5 million from “the house” (aka The World Bank) and the one thing the house is planning on all sinking cruise ship evacuees to do is to maintain a balanced lifeboat at all times; no running from end to end in search of some shred of a genuine free market at the end of a long tail to defend yourself… like silver.
The overconfidence that Dave senses in this market reminds Dave of another overconfident swimmer who thought that the biggest risk to riding the back of a stingray was in getting thrown overboard. The late great crocodile hunter Steve Irwin never expected that the barb on the tail of his mount would pierce his chest and ultimately his heart. Dave would bet that Ray Dalio and Alan Blinder both wouldn’t expect that a million grandmas out there would take out their handbags and beat the market to death like this video clearly shows.
Dave would say his Dad was strong. He raised five boys and ran a successful business. Dave would say that his grandfather was strong. He only went to the sixth grade, yet was ultimately very educated, ran many companies and was the buyer in literally hundreds of real estate transactions in his lifetime. But Dave wouldn’t put either one of those guys up against a little old lady. Dave knows his own Mom dealt with things and also how his two grandmothers dealt with things. If you mess with the little old lady, you are going to pay. Dalio’s suggestion that we are going to be able to force her into a riskier asset allocation is wishful thinking. Blinder’s suggestion that we pay banks a negative interest rate on their reserves which are essentially the little old lady’s reserves and any hope that we can still pay the little old lady a liveable rate on her savings simply don’t add up.
So we’re comfortable, securely and non-volatility-ly sandwiched between a rock and a hard place and the only choice now is to straf the lifeboats. You’ve seen the movie a thousand times. The hostage-taker is stuck between a rock and a hard place or the deceiver is standing in front of King Solomon ready to accept the child, that they claim is theirs soon to be cut in half, rather than to admit that a theft has taken place. In the movie the terrorist destroys the last remaining means of escape (save his singularity in parachute form). If G-Momma ain’t happy, then nobodies are happy and when G-momma finds out that this Recovery.gov is a helium filled balloon that requires an $85 billion per month depreciation of her future buying power will there be anything she can do about it? If you ask Ray or Alan, the answer would be nothing. G-Momma is not only stuck on a perpetual Carnival Cruise where the passengers are heaving the all-you-care-to-eat buffet out of both ends of the ship’s portholes due to a mysterious illness called Regulatorarrhea. It’s what happens when you are on your way to your cabin from the lido deck and you get caught in the revolving door between being a Vice Chair of the Fed and a monetizer of moral hazard. It’s where pump-and-dump meets the stomach pump.
Nassim Taleb explains in his August 2, 2010 article for HuffPo:
The story is as follows. Last year, in Davos, during a private coffee conversation that I thought aimed at saving the world from, among other things, moral hazard, I was interrupted by Alan Blinder, a former Vice Chairman of the Federal Reserve Bank of the United States, who tried to sell me a peculiar investment product. It allowed the high net-worth investor to go around the regulations limiting deposit insurance (at the time, $100,000) and benefit from coverage for near unlimited amounts. The investor would deposit funds in any amount and Prof. Blinder’s company would break it up in smaller accounts and invest in banks, thus escaping the limit; it would look like a single account but would be insured in full. In other words, it would allow the super-rich to scam taxpayers by getting free government sponsored insurance. Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.
So, is G-Momma on lockdown? Is she stuck between the golden “rock” of central banks and the paper ETF gold market where printing “golden” paper is as easy as printing “golden” Sacajawea dollars and the “hard place” of negative interest rates on her savings? Is there no way out as the free market fox has finally been cornered so the post-hunt celebration can begin? Is it time to divide up the spoils of G-Momma and her life’s work? Are we in the home stretch or are we getting ready to encounter that turbulent area where the potential energy of unseen waves meets the hard place known as the coastline?