Biflation Triflation Miflation

Banging on about the current world experience of stagflation in this blog, (amongst other in the inflation tag line) it appears only rarely in the mainstream press, and even the blogosphere.   

Whatever it is that we are experiencing, framing the landscape is critical for setting investment strategies for investors and companies, and fiscal and monetary policies.  

Consider the current investment landscape.  If you are twenty years old, you need to know where to put your money for risk returns.  If you are fifty, you need to know where to put your money for capital preservation.  Indeed, in some issues written in this blog, sovereign diversity is one of the key issues whether through migration to growing countries (such as Mexico) for employment if you are young, or placing some of your savings elsewhere if you are older.  

To confuse analysis of what is written, there are arguments raging about, inflation, chained inflation, headline and core inflation, CPI and RPI, and of course my favourite, stagflation.  And all mean something different. 

Inflation, chained inflation, headline and core inflation, CPI and RPI are all manipulated by the government for budget boosting reasons.  So ignore them – other than a vicarious interest into what the majority of the investors are doing.  

Stagflation means (Wiki) the inflation rate (if it wasn't manipulated) is high and the economic growth rate slows and unemployment remains steadily high.  And that has been my position for some time.  But I have added deflating assets and also wage growth sub (true) inflation on the essentials.

And it is inflation in the essentials that is critical as written about here.  Food, water, shelter, health and education services, and important – energy costs.  

However there are some other inflation derivatives.  Biflation for example.  According to Wiki, first coined in 2002 by Dr F Osbourne Brown, it means there is a rise in the prices of commodity / earnings based assets (inflation) and simultaneous fall in the price of debt based assets (deflation).  Further:

“With biflation on the other hand, the economy is tempered by increasing unemployment and decreasing purchasing power. As a result, a greater amount of money is directed toward buying essential items and directed away from buying non-essential items. Debt-based assets (mega-houses, high-end automobiles and other typically debt based assets) become less essential and increasingly fall into lower demand. As a result, the prices for them fall due to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential assets is the price-deflationary arm of biflation.”

Okay, got that.  And it does seem as though some of these criteria for biflation is being experienced today as well.  But not exactly spot on.  For example, mega houses and the assets of the uber rich (very high end brands) are doing very well.  It is the assets of the middle classes and poorer demographics that are deflating in the OECD countries.  So there is another element missing in biflation.

So I have invented a new term, which encompasses both stagflation, and biflation, with the chasm of the polarisation of wealth, and called it “triflation”.  Representing both aforementioned inflation derivatives but includes the effect on the economies from trickle down policies that is polarising wealth.  

Which as I have written elsewhere, ultimately gives rise to trickle up austerity, and then the next phase is “miflation”.  Another invented term to encompass what is being experienced today for the 99%. 

That is when the masses, impoverished through trickle down policies that give rise to stagflation and biflation, that in turn leads to trickle up austerity, eventually migrate to another country (again Mexico comes to mind) for food and essential services security.  

You read it here first. 

Trust no one

Further on yesterday's blog, and again via zerohedge, comes this chart by Capital Context. 

Zerohedge reports "At 235bps, the FSB30 stands just shy of the peak levels that were seen in the initial March 2009 crisis moment - though remains below Q4 2011 peak crisis levels. "

And this goes to the argument of yesterday.

But first up this is the 30 most systemically important global banks.  That is, they are large and therefore 'safe'.  They are also Too Big to Fail - or - will be bailed out should they make a colossal loss, because to allow them to fail would cause a systemic shock to the global financial system.  So 'safe', right.

Essentially by creating this list of TBTF banks, the regulators have created a run on any other bank in the world, but that is another issue.

But it begs the question of the Fed research in yesterdays blog - when it said that when interest rates are zero US (and global) banks have no financial incentive to put their money anywhere else other than park it with the Fed.  That research piece is a piece of shite. 

This graph shows that a bank who wanted to park its money in (okay this graph is in aggregate, but the point is made) a TBTF bank, it could be earning 25 basis points plus 235 basis points.  Or 2.6% rather than the 0.25% it earns at the Fed.

So there is an opportunity cost, and in todays world, quite a large one.  Using yesterdays data of funds parked with the Fed of US$1.5 trillion, the oppotunity cost to the banking sector (and shareholders) is US$32.25 billion. 

They are prepared to forfeit that revenue for the sake of capital security.  They simply do not trust the counter parties.  They are the ones with the insider knowledge.  And if they don't why would we? 

Right said Fed!

This graph commences in 1950 until the present time.  It measures the capital on the balance sheet of USA banks that is in excess to their requirements according to international prudential guidelines.  That is, capital not required (according to those measures) for them to run their business at optimal levels. More expressly, it is Excess Reserves of Depository Institutions (EXCRESNS), Monthly, Not Seasonally Adjusted, 1959-01-01 to 2012-03-01.  Clicking on the graph will give you a closer view. 

Since the GFC, and in prior forecasts, many people knew this was going to be a big one.  Crash, that is.  That we would be seeing volatility in data reads of extraordinary size.  But this one is just nuts. 

If you follow the blue horizontal line, you will see in late 2001 a tiny blip.  That was not long after the horrific terrorism attack in New York.  And in the few weeks that followed, at least several major US banks were bust so financially it was a very torrid time.

As you move further to the right, you will see that in late 2008 – about the time Lehman Bros was collapsing in the USA - banks started hoarding capital.  That excess now stands at about US$1.5 trillion.  In perspective, that is enough capital for another US$18.75 trillion worth of lending that they are not doing.  And that is of course how banks make profits, by lending out their money.  Well not strictly true any more, but theoretically correct.

Essentially they stopped lending to each other through the money market or interbank market because the view was trust no one.  So they started parking it with the Fed. 

By way of comparison, required reserves are about US$60 billion.  So in effect, these banks have 25 times their required reserves.  

So do they know something we do not?  Why hoard expensive capital, with the toll on profits given there is little place to invest it with much return, unless you are (i) scared out of your wits about another might downturn and massive liquidity crunch or (ii) there is a lot of short term risk (OTC derivatives?) they may have but we do not know, against which they are holding this capital (and not required by prudential standards).  There seems to be a complete loss of trust between counter parties.

Think about it this way.  You run a dairy that relies extensively on the power grid.  Now, occasionally that grid fails, so you have a large generator as a back-up.  Now just say, worst case, the generator wasn’t working, or may not work when required, and you are very cautious, then you may invest some money to have two generators on site.  As you run through this graph you will see that the US banks have the equivalent of 26 generators on the one dairy farm.  That is how cautious they are.

By any measure this is an astounding graph and data set.  And it tells us several things.  First, that the banks are scared out of their wits of the uncertain global economic future, so we should be too.  Second that if or when that hoarded capital starts hitting the streets as new lending, we are in for an almighty rise in inflation, whether in assets prices or consumption prices we should be prepared.  And finally, it really is different this time – but not for all the reasons you usually hear.  We cannot rely on how we each, as individuals, managed for our financial security in the past fifty years over the next fifty.  They will be defined as two different eras. 

Again, to provide another comparison, here is the Net Free or Borrowed Reserves of Depository Institutions (NFORBRES), Monthly, Not Seasonally Adjusted, 1959-01-01 to 2012-03-01.  As bad as things got in September October 2008, the borrowing was only minor compared to excess reserves achieved since then.  It was at about that time, that the Fed Reserve began, for the first time, to pay interest on the excess reserves that banks held with the Fed as the interbank market had pretty much collapsed.  In this they were copying New Zealand’s policies.

If you want the Fed’s research on these excess reserves you can read about it here.  It argues that the money market, which froze in 2008, has essentially been transplanted onto the Fed Reserve balance sheet.  Okay, that is my view of what they are saying.  That is rather than banks lending excess reserves to each other they now park it at the Fed.  

It also argues that when the short term interest hits zero, which it pretty much has, banks are no longer interested in lending out their money and thus generate excess reserves.  It says, “When the market interest rate is zero, banks no longer face an opportunity cost of holding reserves and, hence, no longer have an incentive to lend out their excess reserves.”  Not sure I agree with this, hasn’t anybody heard of risk spread to official rates?  

But it is more interesting when it gets to the topic of inflation.  It argues that because the banks are receiving interest (remember this is for the first time ever) from the Fed, then they do not have an interest in lending great swathes of money and thus creating great swathes of inflation.  It says “By raising the interest rate paid on reserves, the central bank can increase market interest rates and slow the growth of bank lending and economic activity without changing the quantity of reserves.”  The interest rate on both required and excess reserves is 0.25%.  

This must be having a discordant impact on the economy.  For a start the money is not being deployed to boost the economy; second, the people of USA are paying for these excess reserves through the Fed;  and finally, it should be called what it is:  a giant inflation creation.  

Or a great big fat dividend coming for shareholders??  Right said Fed. 

Pennies and Dimes and the 1%

No sooner had we written about the new electronic money in Canada, the MintChip, than we read of new technology with a similar purpose being introduced in the UK. 

It’s called PayTag, and The Telegraph reports that Barclaycard Visa (just reported a GDP2 billion first quater profit) is reputedly introducing the contactless payments.  Effectively a sticker on the back of your mobile phone that is waved over a reader device.  

There is an argument that this non cash form of payment helps identify the participants in the black economy, and contribute to the tax take.  True, but as we wrote in the above blog, it is pennies and dimes.  And a loss of privacy.  And more profits to the banks as they take a slice of every, ever smaller, transaction.  And Martin Vander Weyer in his Telegraph article argues that Britain’s should rise up to save the tenner.

However, I am going to return to my point in the previous Pennies and Dimes blog.  Stop regulating the little guy and regulate the 1% on their over the counter (OTC) derivatives.  This is where the real – very very large profits and losses occur.  And where danger lurks everyday with just the accidental push of a button.  They should be put onto an exchange, where they can for a start be known – eg the size of this market.  Who are the main players.  What concentration risk exists (think AIG in the GFC).  And tax every single one of them.  Evan 10 basis points (0.10%) would be a winner.  

And now via zerohedge to put some numbers on that market. 

I strongly recommend that you have a look at the visual presentation by Demonocracy of the global derivatives market – called Derivatives:  The Unregulated Global Casino for Banks.  This graphics and the detail is superb. 

It argues that 9 large banks (designated Too Big to Fail, and thus WILL be bailed out) hold US$228.72 trillion exposure in derivatives, ~ 3 times the world’s entire economy.  Here is the list: 

Bank New York                                  US$  1.375 trillion

State Street                                         US$  1.390 trillion

Morgan Stanley                                   US$  1.722 trillion

Wells Fargo                                         US$  3.332 trillion

HSBC                                                 US$  1.321 trillion

Goldman Sachs                                   US$44.192 trillion

Bank of America                                 US$50.135 trillion

Citibank                                              US$52.102 trillion

JP Morgan Chase                                US$70.151 trillion

Reported elsewhere, all up the unregulated derivative market is ~US$707,000,000,000,000.  That’s correct, US$707 trillion.  Now just imagine if this market suffers a one percent (1%) loss; that would be US$7,070,000,000,000.  Seven trillion dollars.  Who would pay for that?  Well you of course, we paid for the last loss.

But the point is, whilst we are penny and diming the people of the world with MintChip and Paytag, this market remains unregulated.  And profits untaxed for all we know.  Despite the global financial crisis, and in the face of acknowledgement from regulators that maybe it should be.

A 10 basis point tax on these (completely pointless) transactions, would generate US$700 billion.  More actually, because they trade in nanoseconds, and taxing every transaction would pay off the debts of all the countries currently in strife.  

So next time you use your MintChip or PayTag think on this.  And send a letter to your local pollie demanding that these transactions be regulated and traded on an exchange and taxed.  And maybe put the funds from the taxation into a World Bank fund (or IMF) to bail out the banks next time the fail.  Save us having to pay for it. 

This is the only “real” trickle down policy that would work for everybody.  

Our civil wars

On leaving my role in international investment banking in 2004, I visited my Professor Emeritus from my Master’s days.  And he challenged me to identify the five key issues I would be taking from my relatively successful career (which wasn’t over – just that phase).

One was the sheer scale of corruption / fraud / sailing close to the wind / psychopathy I had witnessed at the top of the largest organisations around the world.

I later went on to research this theory and found that others had of course been there before me, and also that it is only intuitive that a psychopath would rise higher because they are conditioned to do so.  And most people are conditioned to let them. 

There is abundant research that suggests, that although representing only 10% (to varying severities) of the population they have much higher representation in the upper echelons:  for example in law and finance and corporate management and politics.  Again, this is not surprising; but what was surprising was the apparent increasing scale of their representation and the systemic penetration of their pathological ideals.  It also heightened my awareness about how to invest for my future:  diversity by country; real assets; clean passport; live away from major cities; and asset liquidity in severe stress.  

This article brings me back to the point again.  It argues that psychopaths have infiltrated the USA governance to such a degree that it is on a tailspin to severe civil crisis.  Well no news there – I have written about that before – but it does come at it from a different and interesting perspective.  The authors are an investment advisory house, with 50 years experience.  They too concluded similar investment ideals. 

And this article on what Marx would have made of the world today, albeit interesting, does not consider the scale of the rot that is evident everywhere. 

Whilst in Europe last year, the usual watching TV in a hotel room whilst the snow fell, I caught a USA program that I found disturbing.  The name?  Do not recall.  It was a “swat” team of drug enforcers that had, by any measure more weaponry than is reputedly given to the USA forces in the Middle East.  Miami maybe?  A reality show. 

This team would invade homes with massive force, from large SUV’s equipped like tanks, shoot to kill, and scare the living bejesus out of anyone in the vicinity.  It looked like a country at war with itself.

Then there is the increasing internal surveillance carried out by many countries on their own citizens today.  UK, USA, Australia, China.  And protected by the USA Patriots Act that enables a citizen from any (allied) country – for seemingly scant rational reason – to be deported from that country to the USA to meet, in some cases unknown charges.  Internal surveillance and snitching on your neighbour are key signals of governments out of control.  Facism comes to mind.  East Germany. 

All this looks like the psychopaths are winning and in the USA, it is in civil war already.

The author of the psychopath article is spending more time in Latin America (from the USA).  My article on moving to Mexico is looking more viable by the minute. 

Pennies and Dimes

We all know that privacy is gone, gone, gone.  However here is one more (semi) rant on the changes to the fiat in Canada.  Written by James E Miller of the Ludwig von Mises Institute of Canada Via Zerohedge.

Canada is phasing out small currency usage, and introducing digital currency, the MintChip.  This can be used for all small (and I guess large) transactions in Canada and is anonymous (bah humbug).  If data is captured it is used against you in one form or another, and at the very least is valuable information to the tax man, marketers, and your ex during divorce proceedings.  

Mr Miller suggests “Governments have been waging a war on anonymous business since central banking became the norm.”  Well, it has on the 99% Mr Miller.

But not the 1%.  What I find difficult to understand, or at least throw down the challenge, is why if the governments around the world can penny and dime us, why they cannot get the US$700 + trillion of over the counter derivatives onto an exchange so that we can monitor them too?  They are after all the biggest risk, not the penny tax dodger, and the greatest cost to the community when they go boom!!

Its pouring sewage

No stone left unturned in the endeavour to find the sewage messes of the world. 

No sooner had I posted yesterday's blog on the sewage in the beautiful beaches of Sydney, Australia than I am inundated with feedback on sewage problems around the world. 

San Diego is one.

But the most recent report is in the good old UK.  Where the head of sewage company, South West Water, is reportedly pumping semi treated effluent into the water that affects the magnificent beach of Combe Martin, Devon.

The boss of the company says that he wouldn'nt swim there as a consequence.

Honestly, guys.  This is a grown up world.  We have the technology.  You have the money.  Just fix it. 

The Daily Sh*t Report

It was a glorious balmy spring morning.  The air was crisp, the sunshine warming, and the harbour was sparkling and sprinkled with yachts.  I was being driven for the first time across the world famous Sydney Harbour Bridge, and the whole scenario was spectacular.  Even better, it was as a passenger in a sports car with the top down, and I felt like a thousand dollars on my way to a job interview.

It was October 1986, and my first ever visit.  Which is why the “thousand” rather than a million dollars.  Back then a thousand meant something. 

It was peak hour and as we approached the toll gate on the Bridge, manual back then with a lovely friendly lady taking the coins and making change, the radio made an announcement that took my breath away.  Literally.

I had yet to see the infamous Bondi Beach, its wide sweeping white sands and fantastic deep surf rolling in from across the Pacific.  Very few cities in the world have a beach in their midst, so that you can have a surf / swim both before and after work.  In fact Sydney has a number of these beaches both north and south of its harbour. 

The announcement was saying that there could be no swimming today because the beach sh*t pollution was too dangerous.  I kid you not.  It was, I found out later, the daily sh*t report.  How much faecal matter was washing up on the beach.  Too bad if you went for a swim earlier huh!!  And I am not talking teensy weensy bits, but big dollops.

When I first heard it I thought the traffic would stop, and angry people would get out of their cars and start streaming into parliament to get this disaster fixed.  Not a word of it.  Here was I turning blue from being unable to breath, and everybody else was just going along.

Well you can imagine, back in the days of no internet research, it took me a while to piece it all together.  And keep in mind this is a world famous beach and international tourist destination; still today.  Tourism being a multi billion dollar industry for Australia, and especially Sydney.  

Sydney uses an ocean out spill for both semi treated sewage and also for the waste water from roads, footpaths  etc.  This is now going to be fasttracked.  I used to run through the streets in Sydney in the morning before work (I got the job).  But it was hazardous because the immense amount of dog sh*t all over the foot paths.  Again, this was before the pooper-scooper was both invented and then regulated.  I recall reading that thousands of tonnes of this stuff would regularly wash into the ocean via the wastewater system.

And the semi treated sewage, was being sent out to sea in a long pipe.  A solution to the problem, was fixed in late 1980’s by building the pipe longer.  I kid you not.

There are many cities in the world that use this method of sewage management, so Sydney is not alone.  And they still use it.  Because you guessed it, they are still doing sh*t reports.  Here’s the news right here from last month when the sh*t report made the front pages of the local paper.   

Then of course it becomes even more interesting.

Until 2010, Australia was suffering under a severe drought.  Very severe.  Water storage levels of the dams that feed into Sydney were at dangerous levels – real fears about running out of water in Australia's main city was on the cards.  There were water restrictions that the UK would be familiar with now.  Sydney was dry.

So the government decided to build a desalination plant at Kurnell.  You can read all about it here.  It cost $1.896 billion.  Now, I am not sure, but I think this plant is sucking up the very same water for the people of Sydney into which it is emptying its sewage.  But whatever. 

And because it was a public private build, Sydney must keep paying for this plant whether it is making water or not.  Millions of dollars a year.  And you guessed it, for the last two years Sydney and its surrounds have had nearly unprecedented rain – to the point where its main dam was required to release water – that there is no use for the new water being generated by the desalination plant.  

Why not just recycle, Sydney, recycle the hundreds of gigalitres of water being pumped into the ocean with untold damage (who could ever eat fresh fish out of Sydney again huh!) to the marine life.

Well I now learn that they are.  Three new recycling plants will be opened in 2015.  Nearly 30 years after I heard the first sh*t report.    Which will continue. 

Buy Mexico?

Yesterday’s blog looked at the forecast problems of food and borders.  Specifically food inflation and how people will cross borders into different countries to obtain food security.

Tangentially, it also suggested that migrants from the USA could well be on the cards, given its rising food inflation and also low GDP and tragic unemployment figures.  Although not as bad as Greece and Spain – about which it is difficult to come to any conclusion how those societies will continue under such overhanging despair.

Then to this story, about illegal Mexican migrants returning from the USA to their home because the opportunities are greater in Mexico than the USA.  It reports that there were 12 million illegals, and over the five years to 2010 that number has fallen to 11 million.  One professor in the article refers to a net zero immigration for the first time since 1960.  Wow!!  And the 1 million is three times higher than the preceeding 5 year period.  There are some lovely stories in the article and worth a read.  Quite a bit about growing their own food as well, once they arrive home.  

However the article is interesting in other ways.  There is extensive research that shows that high immigration – or a high educated population growth – is a long term boost to an economy.  And that is what is happening as people return to Mexico, essentially.  And Mexico’s children per family ratio has also dropped, to just over 2:1 from 7:1.  This usually happens when you educate women research shows.  Per capita income is also higher as a result, as income and wealth rises.  And education is also rising.

All of which means that this is good for the economy.  And possibly good for long term investment.

And maybe I was wrong yesterday, when suggesting that Americans may be turning up in France!!  Maybe it is Mexico. 

Food and Borders

It is a crazy juxtaposition when the meat in USA is increasingly shifting towards ground beef (mince – burgers) as the hungry shift to lower cost protein;  whilst the meat shipped to the advancing countries in Asia is for steaks as the new middle class upgrade their protein meals.  

Updating the FAO Food Price Index for March, it is always surprising at how results are reported as “benign”.  It is quite correct to say that the March 2012 figure (216) came in barely above the February figure (215).  But as this graph shows, the index has grown by more than 14% per annum in the last three years.  That is not benign.

And of course the index over times shows that global food in both nominal and real terms remains near all time highs.  

Food prices remain critical for the world’s societal security and stability, which has been taking a beating lately (oh you know, the Arab Spring, Occupy, Mediterranean Austerity policies, and my household budget – if I had one).  And I have been banging on about it in my Peak food blogs, and inflation expectations.  

And all these issues have a real – meaning material – input into investment decisions these days.  Far more than they did in the past.  Not just as an indicator to investing in rural assets, or processors, or inputs (such as potash), but also where to put your assets so they will return a reasonable risk adjusted rate, but also protect capital.  My view is that a risk (including liquidity risk) and inflation adjusted return of zero percent with capital preservation over the next 5 years would be a winner in financial assets.  But the return on cattle is up near the 70% per annum.  With capital preservation.  Only subject to disease, which can be insured at a reasonable cost.  

In what countries will your investments be secure if food insecurity starts to rampage?

The CRB Index is down since the beginning of 2011, from a peak of nearly 700 (recorded peak) to 583 at present.  However, the pace of inflation in commodities since the mid 2000’s when it moved from about 250 (a cyclical high / range ceiling) to ~700 in 7 years.  

Commodities represent a significant input to the cost of food in developed economies, and to a lesser extent urbanised countries such as China, which recently passed 50% of the population living in urban centres.  By way of comparison, in the USA, the comparison is 82%.  Why?  Because food needs to be transported, requiring fuel inputs.  Crude oil is off its highs, but still at much higher levels than traditionally, when GDP is so soft everywhere.  

The Economist reported on the urban trends around the world here in January past.  So there are a number of issues pointing to food inflation rising faster than official inflation (which I do not believe for a moment) everywhere.  Increasing global population; shift to more dense protein diets by the new middle classes in the BRIC countries (less the middle classes in the so called advanced economies as their middle classes shrink – but at a slower pace); and rising urbanisation requiring greater input of fuel and energy for delivery and ag mechanisation to meet this growing need.  

In the USA food inflation in 2011 was officially 3.7% per the USDA and forecast to be 2.5-3.5% this year.  Right!   But this Bloomberg report suggests that corn and soy reserves are the lowest in years and could push food inflation to be at the higher end.  As I keep banging on – we have stagflation in the essentials:  food and energy.  

And then of course there is the other side of the story.  The USA’s food banks that feed the nations 49 million hungry people (16% of pop) are reporting they may be unable to feed these people due to higher food costs.  They argue that food inflation was 6% in the last 6 months of 2011 (putting the lie to the official rate), and that the healthy foods (fruits, veges, meat and dairy) provided to them fell 30%.  No wonder burgers are booming. 

And Sarkozy is complaining about the border controls of the EU member countries.  And of course picks on poor old Greece.  But zerohedge is reporting that this flow of immigrants are returning home, because frankly things are better there than in Europe.  Gate and horse bolted comes to mind, Sarkozy.  If you continue to impoverish the Mediterranean  countries with your austerity measures, border control done and dusted!

But the important point is that as the hungry grow, borders will become a problem.  Would Sarkozy be as tetchy if it were Americans arriving in hoards looking for work and a better life?  

Food inflation is going to change how we manage borders, how we manage safety within borders, and how we invest our savings as people and where we invest our capital as companies.