Hiroshima Myth

"The principle of law in every civilized society has this in common: Any person who sways another to commit murder, any person who furnishes the lethal weapon for the purpose of the crime, any person who is an accessory to the crime...is guilty."
--Judge Dan Heywood (Judgment at Nuremburg)

On August 6, 1945, a United States B-29 dropped the world's first atomic bomb in Hiroshima, Japan. Three days later another A-bomb was dropped on the city of Nagasaki. Japan surrendered later that month to end WWII.

An estimated 120,000 perished in the two blasts with hundreds of thousands subsequently maimed or killed from radiation exposure. The lion's share of casualties were civilians--mostly women and children.

The popular myth trotted out to justify this carnage is that, by bombing the Japanese mainland and inflicting death and destruction to a degree that forced a surrender, the US subsequently avoided more than a million additional military casualties that would have resulted from the ongoing conventional war campaign--including an inevitable invasion operation of Japan.

As discussed in this article, this amounts to little more than the rationalization of atrocity.

The fact is that Japanese officials signaled their willingness to conditionally surrender earlier in 1945. Their condition was that Japanese emperor Hirohito would remain in power and not be subjected to criminal investigations after the war. The idea was to preserve as much Japanese culture as possible, and to provide continuity to facilitate economic and social functioning in post-war Japan.

Sadly, President Truman and his lackeys were unwilling to accept anything other than unconditional surrender--quite ironic since after the war Hirohito was indeed permitted to remain as emperor until his death in 1989. 

Why, then, were the bombs dropped?

The answer is that Truman and his staff, particularly his confidante and future secretary of state James Byrnes, had their eyes on Russia. Using atomic weapons would demonstrate US military strength to Russia and keep Stalin & Co at bay as the superpowers entered a 'cold war.' A secondary reason was that Congress could be assured that its secret appropriation for the Manhattan Project was bearing fruit that created near and longer term benefits.

Following the bombings, however, many officials, including Commander of the Third Fleet Admiral Bill Halsey, Fleet Commander Chester Nimitz, Chairman of the Joint Chiefs of Staff William Leahy, and atomic theorist Albert Einstein, condemned the action. 

This is when the propaganda machinery got into gear. Editorials and articles began to hit the pages of newspapers and magazines about the military necessity of the bombings. The myth has been continually reinforced, usually around this time of year, by political leaders and a complicit media. 

Perhaps in a brief moment of conscience, Henry Stimson, who was secretary of war at the time and chief propagator of the subsequent Hiroshima myth, wrote in his memoirs, 

"Unfortunately, I have lived long enough to know that history is not what actually happened but what is recorded as such." 

Indeed, Mr Stimson. My sense is that you and many of your contemporaries will face, quite literally, the trial of your lives on Judgment Day.

Yen Destruction

One day you feel quite stable
The next you're coming off the wall
But I think that you should warn me
If you start heading for a fall
--Saga

When leverage + money printing start going way wrong, the billiard balls begin careening around the table. One never knows where the blow ups will occur.

This time around, Japan is becoming an epicenter. Faced with unrelenting Bank of Japan (BOJ) intervention, the yen has been getting pounded and sits at 20+ yr lows. 

Now, with the 10 yr Japanese government bond (JGB) yield hitting the upper band tag in the BOJ's yield curve control program, the BOJ has bought about 1.5 trillion yen's worth of JGBs. If the pace continues through end of month, the BOJ will have purchased about 10 trillion yen's worth of bonds.

To put that in perspective, that would be the equivalent of the Fed doing more than $300 billion of QE when adjusted for GDP.

It is hard not to envision outright monetary collapse if the BOJ does not take its foot off the gas soon.

What that means for financial systems worldwide, as integrated as they are, is anyone's guess.

Public Health Philosophy

Sometimes you're better off dead
There's a gun in your hand 
And it's pointed at your head
--Pet Shop Boys

Robert Malone proposes that public health policy is built on two philosophies: utilitarianism and Malthusianism.

Utilitarianism posits that the morally right action is the action that does the most good. It is a form of consequentialism--the correct action is assessed solely in terms of results produced. 

Utilitarianism fosters what these pages have deemed 'greater good accounting.' If a program is deemed to help more people than it hurts, then it is deemed a winner.

Malthusianism springs from the writings of political economist Thomas Malthus, who believed that population growth would outstrip food supply and other scarce resources, consequently triggering global poverty and death. 

The central implication of Malthusianism is population control. Limit the number of births so that future standard of living won't be compromised by too many people walking the planet.

Two hundred plus years, and billions of people, later and the world has yet to hit Malthus' dreaded upper bound of population. Why? More people produce more, which alleviates the scarcity that worried Malthus. Moreover, those people innovate, applying capital in manners that improve productivity even more.

Meanwhile, countries that have seen birth rates decline significantly, such as Japan, face major demographic headwinds likely to restrain standard of living in the years ahead.

None of that matters to public health officials, or climate alarmists, or socialists in general. The ingenuity that flows from liberty must be restricted in favor of utilitarian and Malthusian central planning. 

Never mind the misery and chaos that such planning creates... 

Political Prisoners

Trim life shadows flicker and fall
But you still can't turn away
Get up and run before you stall
Before the edges fray
--Ric Ocasek

Ron Paul discusses the US version of Soviet show trials in which people who entered the "People's House" in January are being imprisoned on political charges. They are accused of being terrorists despite commission of no violent acts or nor evidence that they contemplated terrorist acts.

This is not the first time the federal government has unjustly held political prisoners. John Adams and the original Sedition Acts, Lincoln during the Civil War, FDRs WWII internment camps, the ongoing Guantanamo Bay group.

As Paul warns, people who are ok with this sort of thing--particularly because the present wave of convictions aligns with their political views--are likely to see the tables turned at some point.

When prisoners are permitted to be taken for political purpose, sooner or later, they're coming for you.

Place To Be

When situations never change
Tomorrow looks unsure
Don't leave your destiny to change
What are you waiting for?
--Swing Out Sister

Graph below shows that US equity markets have been the place to be over the past decade.

What will the coming decade bring?

Large and In Charge

"You can walk out of here...or be carried out. But have no illusions, we are in charge."
--Hans Gruber (Die Hard)

The relationship between central bank monetization programs and stock market prices cannot be overstated.

Note the blue shaded 2016-2018 period. The Fed's balance sheet was flat while the SPX legged higher. Correlation breakdown?

Not quite. As noted on the graph, this it the period when monetization programs at other central banks kicked into overdrive. ECB, BOJ, and others initiated QE programs that made the Fed's look like child's play. The graph above captures the global central bank leg a bit better.

But now the Fed is back. Large and in charge.

Equity Market Tops

"Made it, Ma...top of the world!"
--Cody Jarrett (White Heat)

Interesting graphs showing tops in various equity markets. By definition, a top is a high point. Following tops in Japan, Europe, and emerging markets, major indexes in those geographies have essentially moved sideways--in some cases for decades.

US stock markets have not fallen in line with the pattern...as of yet.

Fallacy of We

Leo Getz: You hungry? I'll call for anything you want. See this silk robe? Free.
Sgt Roger Murtaugh: It's not free. 
Leo Getz: Yes it is.
Sgt Roger Murtaugh: It's taxpayer's money.
Leo Getz: Same thing.
--Lethal Weapon 2

Article discusses the absurd claim that federal debt is not a problem because it is money that we owe to ourselves. The 'we owe it to ourselves' crowd argues that because government debt can be passed on to future generations, the debt can persist into perpetuity so long as people are willing to lend and government is able to service the debt. Moreover, because federal debt is owned by domestic citizens, the money used to repay debt doesn't leave the economy.

But, as the article points out, about 1/3 of federal debt is in fact owned by outsiders. In other words, we don't owe a substantial portion of federal debt to ourselves. We owe it to others.

A larger problem can be called 'the fallacy of us, we, and our.'  Individuals lend and borrow, not collectives. Individuals who incur federal debt are different from individuals who bear the burden of repaying the debt. The beneficiaries are people today who enjoy the borrowed funds and what they can purchase. However, future taxpayers are hurt, as they must repay the debt borrowed by previous generations.

However, the most fundamental problem is one not directly addressed in the article. Government debt constitutes borrowing by force. Sovereign debt is a contract between governments and private lenders with the promise that bond principal and interest will be repaid by citizens under threat of force. Confiscating economic resources by force distorts how those resources would have been allocated by individuals engaging freely in production and trade.

Moreover, when government knows that it can take resources at gunpoint, it will surely 'borrow' more, which leads to lower saving and, ultimately, to capital consumption over time.

The result is fewer resources available for investment and productivity improvement down the road. Prosperity, consequently, is restrained.

Central Banks

So glad we've almost made it
So sad they had to fade it
Everybody wants to rule the world
--Tears for Fears

Central banks are government-affiliated institutions that manage 'monetary policy' for single countries or groups of countries. Monetary policy involves the fixing or controlling of interest rates, money supply, exchange rates, and/or asset prices, among other things--ostensibly to achieve high-level goals related to economic activity, price stability, trade, or degree of employment.

All countries in the world operate their own central bank, or ride the coat tails of someone else's central bank authority, to enact their monetary policy. Some of the more influential central banks include the Federal Reserve (United States), Bank of Japan (BOJ), European Central Bank (ECB, European Union), and People's Bank of China (PBOC).

Because central banks manipulate key variables that influence economies and markets, such as prices, interest rates, and money supply, they exert tremendous influence on market behavior. Whether one agrees with the tenets of central banking or not, investors must respect the power of these institutions--lest they risk getting their heads handed to them.

In future posts we'll discuss issues related to central banking--particularly as they relate to our home-base central bank, the Federal Reserve.

Yield Arbitrage

"So, arbitrage...talk about adrenaline, huh?"
--Tess McGill (Working Girl)

Jaw dropping move in long bonds this am. 10 yr yields down over 8%(!) as money pours into US Treasuries.

You pick the cause(s). Flight to safety/mounting risk aversion. Front-running more Fed cuts--anticipating perhaps FOMC caving to presidential demands. Yield starved fixed income investors in other parts of the world seeking a positive coupon. Leveraged black boxes jumping on the momentum bandwagon of a trade that's 'working.'

Regardless, yield differential between US and rest of world is quickly being arbitraged away.

Interest Rate Arbitrage

Maybe someday
Saved by zero
I'll be more together
--The Fixx

Perhaps the president won't have to wait for the Fed to lower rates some more. The bond market appears to be leading the way.

After the past week's events, Ten Year yields have broken to new lows for the move. They now sit at about 1.86%.

Interest rate arbitrage between those at zero or lower (e.g., EU, Japan) and those at greater than zero (US) is revving up.

Sovereign Debt Distortions

Watt: How's it feel to be carrying all that cash in your pocket?
Keith Nelson: Well, a little uncomfortable.
Watts: Want me to tell you one more time that I think you're crazy?
Keith Nelson: Nope.
Watts: Been hording that cash for years?
Keith Nelson: Yep.
Watts: How bad's your dad gonna ream you?
Keith: You won't be able to measure it with existing technology.
--Some Kind of Wonderful

On the back of yesterday's post about the inverting UST yield curve, some eyebrow-raising anomalies among sovereign debt yields worldwide help explain what we're seeing in Treasuries. Here are some rates on various 10 yr country bonds per WSJ as of this pm:

US   2.243%
UK  0.900
Sweden   0.005
Spain   0.765
Portugal  0.863
Netherlands   0.021
Japan   -0.081
Italy   2.651
Germany   -0.171
France   0.242
Belgium   0.320
Australia   1.543

Only two countries besides the US sport rates above 1% (!). Many are close to zero. In fact, yields on 10 yr German and Japanese bonds are negative, meaning that creditors are effectively paying debtors for the privilege of owning the paper.

What is going on? It's the global version of 'quantitative easing.' Central banks, namely the BOJ and ECB are buying sovereign debt in an effort to keep rates low. Interest rates on bonds go down when prices go up. As central bank buying programs bid up the prices of sovereign debt, yields shrink globally.

Although they may be difficult to measure with existing technology, the market distortions wrought by this activity help explain what is going on here in the US. If you are on the market for 10 yr sovereign bonds, which country offers the best risk:reward prospects?

As investors vote with their wallets, they are buying US tens in size, which is pushing their rates lower than would be the case in unhampered markets.

Just vs Unjust War

"War is a continuation of politics by other means...Von Clausewitz."
--Captain Frank Ramsey (Crimson Tide)

A just war is fought purely in self defense. No provocation. No preemption.

Few wars fought by the United States satisfy this criterion. Instead they have mostly been fought to satisfy political objectives such as advancing democracy, generating economic stimulus, preserving the union, maintaining flow of critical economic resources, stopping communism.

The US has often engaged in war after provoking opponents. It has also engaged in preemptive strikes. Preemption defines aggressors, not defenders.

Today, pray for the millions of casualties of unjust war.

Fed Walk Back

Relax said the night man
We are programmed to receive
You can check out any time you like
But you can never leave
--Eagles

Yesterday's FOMC announcement verified what markets have been sniffing out for weeks--that the Fed is caving to pressure to stop their rate hike program. There is also chatter that the Fed will quit selling their bond portfolio a little early--perhaps after peeling only a couple hundred billion$ in assets from their $4.5 trillion balance sheet. Pre QE, the Fed's balance sheet was about $0.5 trillion large.

It took only a 10-20% pullback in stocks (following a 2-3x move higher in major stock indexes since the commencement of aggressive monetary policy) for the Fed to ease off the brakes.

Some believe that merely stopping the tightening will not be enough to keep the bubble from popping. Not sure about that. Real rates are still negative, credit money is still being created out of thin air, and all of the money created by $4 trillion in QE bond buying (and multiples of that created by ECB, BOJ, and other central banks) seems like the stuff of big inflation to me.

The Fed's policy walk back reiterates what we already knew. Central banks have checked into a monetary roach motel that they can't leave.

Normalizing Crazy

"Crazy is on the bus."
 --Danny Roman (The Negotiator)

Interesting point raised last Friday by Fleck. He believes that the best analog to the current stock market situation is Japan in the 1980s prior to its epic bust. In particular he feels that there is a parallel in the extreme investor confidence that accumulates when huge and prolonged deviation from norms becomes status quo.

"When something crazy lasts longer than anyone would think possible--and that could be a few months or many years--the duration can somehow sanction in people's minds whatever is happening, as if the length of time somehow adjudicated the ultimate outcome of the policies or the environment."

Stated differently, the longer craziness persists, the less crazy and the more normal it seems.

Meanwhile, the Nikkei remains well below its all time high of nearly 30 years ago.

Negative Real Rates

"You know, the funny thing is, tomorrow if all this goes tits up, they're gonna crucify us for being too reckless. But if we're wrong and everything gets back on track? Well, then, the same people are gonna laugh till they piss in their pants because we're gonna look like the biggest pussies God ever let through the door."
--Will Emerson (Margin Call)

The difference between the nominal interest rate and the inflation rate is known as the real interest rate. If a fixed income instrument yields 5% annually but the purchasing power of the yielding currency is declining at 6% rate, then the 'real' yield is -1%.

A few years back, central banks embarked on policies known affectionately known as NIRP (negative interest rate policy). The idea was to make central bank yields so low that, when coupled with inflation, they discouraged saving in favor of spending. Presumably, this policy would be reversed as economies subsequently firmed.

Every major developed country central bank in the world is maintaining negative real interest rates in what is now the 9th year of a global economic expansion.https://t.co/dAjqRK0ot4 pic.twitter.com/cmkfRhU8zi

— Charlie Bilello (@charliebilello) February 13, 2018

The 'official' numbers tell us that, here in 2018, we stand in the ninth years of a global economic expansion. Yet, as indicated above, every developed country central bank in the world is maintaining negative real central bank lending rates.

Maintaining such easy money policy in the face of strong economic data signals one of two things. Either the 'official' numbers are wrong, or this is the greatest example of incompetence in the history of central banking.

C Words

"This is it! I'm telling you this is it!"
--John Tuld (Margin Call)

Domestic markets were splattered today. The SPX was down about 4%.

The Dow closed over 1000 pts lower and was down 1500 intraday. That's the first time the Dow has lost 1000+ in a session.

Carnage continued after hours, with major indexes quickly approaching their 200 day moving averages--a level that seemed so far away just a short time ago. Nikkei futes have been indicated about 8% lower.

This bring to mind two c-words. Crash and contagion. They are not unrelated.

no positions

Becoming the Market

I've got your picture, I've got your picture
I'd like a million of them all around my cell
I asked the doctor to take your picture
So I can look at you from inside as well
--The Vapors

Nice picture of the relative position of all central banks (not just BOJ) in markets.

Not only are they increasingly involved, but CBs are quickly becoming THE market...

Debt and GDP

In violent times
You shouldn't have to sell your soul
In black and white
They really, really ought to know
--Tears for Fears

Uncited but simple list that ranks debt as a percentage of central government GDP.

Government debt as share of GDP.

Japan: 250%
Greece: 179%
Italy: 132%
US: 106%
Spain: 99%
France: 96%
Canada: 92%
UK: 89%
India: 69%
Brazil: 69%
Germany: 68%
Pakistan: 66%
Netherlands: 62%
Israel: 62%
China: 46%
S Korea: 38%
Turkey: 28%
Russia: 17%
Saudi Arabia: 13%

— The Spectator Index (@spectatorindex) November 15, 2017

US is number four. Federal debt now exceeds $20 trillion.

Cryptos as Gold Substitutes

Jacob Moore: So what's your number, Bretton?
Bretton James: More
--Wall Street: Money Never Sleeps

We recently noted that gold bullion sales have been soft this year despite a sociopolitical environment often favorable for precious metals. One explanation is that cryptocurrencies such as Bitcoin are increasingly seen as a viable alternative currency to dollars, yen, euros, et al. And because they are perceived as having sound money properties, they are being purchased as a substitute for gold, thereby siphoning money away from bullion.

Yesterday, I heard a radio personality who has historically been bullish on gold recommending that his listeners should diversify their portfolios with some Bitcoin.

I have no doubt that this phenomenon has contributed to soft gold demand. I also have no doubt that the proposition that the cryptos are a sound money alternative to gold is wrong--something that we will discuss later.

Meanwhile, I personally welcome the current softness in gold prices as I am a net buyer. My constant fear is that gold prices will take off before I get done accumulating the metal in its various forms.

Of course, in this environment, I'm not sure my appetite for bullion can be sated. The rise of the cryptos has only intensified that feeling.

position in gold