Category Archives: Economics

BofA FX Strategist breaks down the state of G10 Currencies

10/16/2014 Portland, Oregon – Pop in your mints…

Yesterday we had the pleasure of hearing a presentation by John Shin, the G10 FX Strategist at Bank of America.  Mr. Shin is highly intelligent and a deft presenter, as one would expect from someone of his caliber (Harvard PhD in Econ, etc.)  He also managed to make the material, essentially a rehash of Central Bank rate policy over the past several years through today, somewhat entertaining and relevant.

One of the big takeaways from the presentation was that the ECB has not been performing well in its role when compared to the FED, Bank of England, and Bank of Japan, against which it is often compared.  Mr. Shin acknowledged that in many cases their hands are tied as, while they have the experience, they seem to struggle with their mandate, to maintain a stable currency, as they are vilified in a world where other Central Banks have taken stimulus to extremes once thought unimaginable.

The Euro is a very important currency.  The Euro and the ECB as its managing institution are also very young relative to their counterparts.  Making their job even more difficult is the fact that they are managing the currency for the Eurozone, whose internal fiscal and market dynamics at time defy analysis if not logic.  Here at The Mint, we recognize that the ECB is simply making the best of what’s around as they constantly mend the currency union that holds what is at times a tense economic union together.

Mr. Shin also spoke at length about the Unemployment rate in the US and the associated workforce participation rate (roughly 64%) which has rapidly declined due to, according to Shin, a roughly 50/50 mix of demographic and economic factors.  He also put the workforce participation rate in perspective, as it is still above where it was in the 1960’s, roughly 59.5%.

Generally, he was bullish on the US Economy and the US Dollar, and had pegged his expectations for FED rate increases to mid-next year.  It will be interesting to see if his call plays out.

After the presentation was finished, we asked him for a nugget of advice in terms of what his one Key Indicator was to keep a pulse on economic activity.  He said that, while they track many indicators, as one would expect, there is none that speaks more to the contemporaneous state of the US economy than the monthly jobs numbers.  Concretely, when they top 200,000, the economy is in good shape, anything below that is a bad thing in his view.  He said no other data point correlates so well with other economic growth indicators.

So there you have it, the dollar will remain strong and as long as the economy adds 200,000 jobs or more per month, all is well from the perspective of one of B of A’s best and brightest.

Creidt Sui

Mr. Shin is in charge of the “World at a Glance,” which is their flagship publication which highlights the bank’s key forecasts in FX, rates, and commodities.  An extremely interesting read put together by some of the best in the business.

Will his forecasts on FED rate increases come to pass in mid-2015?  If today’s market action is any indication, low rates could be with us for a long time to come.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for October 16, 2014

Copper Price per Lb: $2.98
Oil Price per Barrel (WTI):  $83.02

Corn Price per Bushel:  $3.52
10 Yr US Treasury Bond:  2.15%
Bitcoin price in US:  $391.63
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,239

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  5.9%
Inflation Rate (CPI):   -0.2%
Dow Jones Industrial Average:  16,117
M1 Monetary Base:  $2,815,400,000,000

M2 Monetary Base:  $11,513,000,000,000

5.9% and why it doesn’t matter

10/3/2014 Portland, Oregon – Pop in your mints…

Today the BLS reported that payrolls grew in September and that the stated unemployment rate dropped to 5.9%.  They also published the labor force participation at 62.7%.  The handy chart below from the folks at Business Insider shows how steeply labor force participation has dropped over the past five years.

Labor Participation Courtesy of BI
Labor Participation Courtesy of BI

Labor Market Participation aside, the 5.9% unemployment is exciting for banks.  On one hand, it can be seen as a sign that more people are working and theoretically becoming creditworthy.  This is big because consumers with deposits are cherished in the Basel III framework that they are painfully working their investment ladders into.

On the other hand, it is seen as just high enough that the Federal Reserve will not raise short term interest rates for fear of “derailing the recovery” or whatever phrase Janet Yellen chooses to employ in her latest effort to mask the brutal fact that they are continuing to provide money free of charge to a painfully inept banking cartel.

While much will be written about today’s “Goldilocks” job report, it matters not in terms of Fed policy.  The Fed will continue to offer money free to banks until they are certain that Basel policy reforms will not inadvertantly cause (rather than prevent, as they are designed to do) the financial crisis.  Meanwhile, in the real world, the cost of labor, meaning the cost of hiring someone who can actually perform a specific task, is about to skyrocket.

The reason for this is that there remain severe imbalances in the labor market caused by recent advances in technology, namely cloud based administrative services and logistics, which are now colliding with a relative decline in the recent productivity gain that said technology was providing.  While large productivity gains having been the norm, there is soon to be a lack of persons who have the requisite skills to run such systems efficiently, which means that those productivity gains will at a minimum not continue and may even be lost.

There is also another labor undercurrent that the BLS data does not capture.  This is the large scale disruption of entire industries that the cloud and logistics revolution is enabling.

Indeed, there is much more to the labor market than a tidy percentage point can express, as nearly five years of ZIRP is pushing the division of labor to new extremes.  Employers, Employees, and the BLS may soon become archaic terms, as American Society moves towards outsourcing on steroids.

Today’s 5.9% is little more than bad information, unless of course, you are a banker, in which case it means that the Goldilocks days are here again, and the Fed’s subsidy, a license to strip mine the earth that is provided on the backs of its inhabitants and nature herself, will continue until further notice.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for October 3, 2014

Copper Price per Lb: $3.04
Oil Price per Barrel (WTI):  $89.68

Corn Price per Bushel:  $3.23
10 Yr US Treasury Bond:  2.45%
Bitcoin price in US:  $377.60
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,192

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  5.9%
Inflation Rate (CPI):   -0.2%
Dow Jones Industrial Average:  17,015
M1 Monetary Base:  $2,833,300,000,000

M2 Monetary Base:  $11,418,000,000,000

The New Labor Market – Scotland’s Lesson to Labor

9/19/2014 Portland, Oregon – Pop in your mints…

The results of the Scottish referendum on independence are in, and in the maneuvering leading up to the vote as well as the results themselves, the Scottish question has brought to light a new dynamic that many economists, including yours truly, have been late to properly identify:  The astronomical rise in the cost of labor that is on the horizon.

What do Scottish/English politics and the labor market have in common?  Nothing, really, save the dynamic between an overlord (England/Employer) and underling (Scotland/Employee), and the rapidly changing status quo.

First, a brief overview of the Scottish referendum from an economic standpoint. Astute readers will note that we have an extremely basic understanding this.  That said, the little we do understand serves our metaphor.  As such, we dare not risk deepening our understanding at this point.

Our aforementioned understanding is the following:  As part of the United Kingdom, Scotland enjoys a £32 Billion per year block grant, for which it cedes approximately £7 Billion per year in North Sea oil tax revenues, and approximately £16 Billion in other taxes rendered to England, bringing England’s net subsidy to Scotland to roughly £9 Billion per year.  You can read more about the economics of Scottish Independence at the ever Clairvoyant Market Oracle.

Scottish Independence YES Vote Panic

As you can see at the end of the above video, the chances of Scotland actually voting “Yea” for the referendum were extremely far-fetched and rightfully cause for panic.  Furthermore, we observe that the reaction of the English, predictably, was to cave to Scottish demands for autonomy and, ultimately, an increase in the net subsidy in exchange for remaining part of the UK.

As the Scottish economy represents roughly £160 billion annually, it is clear that the £9 billion hit in terms of the subsidy loss would be devastating.  Devastating as it may have been for the Scottish people, the loss was at least calculable and to some extent containable.

On the other hand, while England appears to have forfeited a good deal of autonomy, not to mention being out a net £9 billion on the Scottish subsidy, their zeal to keep Scotland in the UK is explained by one simple fact:

Scotland is irreplaceable, and for England to forfeit its allegiance now is not only to turn its back on a union forged over the course of 300 years, it is to look forward to a future of Balkanization and an incalculable demise in its political and economic power as the sun finally sets on an Empire that at one time could rightfully claim that the sun never set upon it.

Do you now see how the metaphor applies to the labor market fellow taxpayer?  In simple terms, Employee (Scotland) threatens to leave Employer.  Employer reacts by giving employee more autonomy and pay.

This scenario is playing out across certain cross sections of the US Labor market and is about to have a tremendously disruptive effect on what many have come to understand to be the status quo in terms of Corporate employment.

While it may be true that, unlike Scotland, most employees are replaceable, it is also true that with each employee that walks out the door, an incalculable amount of synergies and institutional knowledge leaves with them.  Couple this loss of intangibles with the fact that the employee that will be hired to replace them is likely to be 1) More expensive, 2) Less productive, and 3) Less loyal than the one that just walked out the door.

Like Scotland, many employees are finding that, while they have something to lose by leaving their employer, the loss is calculable and often more than compensated for by the potential gains awaiting them as the current game of musical chairs disrupts the low cost of labor, a hidden subsidy that many corporations have come to rely on.

While it may appear that employees, like Scotland, have much to lose and little to gain by declaring their independence and seeking new alliances, in reality it is the corporate status quo, such as England, that stand to lose the most in this latest game of musical chairs.

In the end, England will pay dearly for maintaining its alliance with Scotland.  Will your employer pay dearly for you?  You may be surprised by the answer.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for September 19, 2014

Copper Price per Lb: $3.13
Oil Price per Barrel (WTI):  $92.41

Corn Price per Bushel:  $3.31
10 Yr US Treasury Bond:  2.58%
Bitcoin price in US: $396.09
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,216

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  6.2%
Inflation Rate (CPI):  0.2%
Dow Jones Industrial Average:  17,279
M1 Monetary Base:  $2,747,800,000,000

M2 Monetary Base:  $11,479,800,000,000

The US Economy is Already Going Gangbusters

8/29/2014 Portland, Oregon – Pop in your mints…

Amid what has become a nearly constant stream of alarming news from the Middle East and the escalation in the Ukraine conflict, the US Economic growth has quietly been amassing the fuel for what is shaping up to be an impressive period of extended growth.

Readers of The Mint are aware that we follow a baker’s dozen of key indicators, which are presented at the end of each edition, in order to gauge the actual state of the economy via money supply growth and some of the key inputs and outputs as to what expectations are as to the future state of the money supply. Setting aside the fact that what we use as money is not really money at all, but not so cleverly disguised debt, the state of the money supply gives us a sense as to what will happen in terms of employment and asset prices, the fodder which ultimately impacts GDP. Overall, our key indicators have been steadily signaling growth ever since 2009.

While the fuel has been amassing for approximately 5 years now, it is now poised to be coupled with the proverbial spark necessary to spur growth rates reminiscent of the late ’90s – 2007: Improving sentiment.

You won’t see improving sentiment on TV, hear it on the radio nor read about it in the news. You see, improving sentiment doesn’t draw people to read the news, doom and gloom does.

Improving sentiment can be seen in a very conspicuous place in American cities: Increased traffic, be it car, pedestrian, freight, or public transit. When people are out and about, they are generally doing something. The fact that more people are out tends to beget additional economic activity. It is largely a chicken and egg question but in the cities, when you see traffic increase, it is a good bet you are witnessing economic growth first hand.

Have you seen traffic on the rise where you are? In Portland, it has been staggering.

Confirmations that the US Economy is already going gangbusters and may be poised to go into hyper drive for at least the next 5 years are beginning to pop up in the mainstream media:

Deutsche Bank us expansion timeline
Deutsche Bank us expansion timeline

You might ask what will drive this expansion? While there is truly no catalyst or new age industrial revolution on the horizon, there is an avalanche, tsunami, (insert your favorite metaphor) of money itching to get out of government bonds and into something, anything that will paradoxically give it increased yields and security.

2014 government bond yieldsAs in the past, this money will find its way into real estate, the much scourged asset class that is now surprisingly affordable on a relative basis. Once that happens, we know the script, and the expansion expected by the market in the first chart above seems probable, indeed, inevitable.

Here at The Mint, we have been beating the drum of recovery for some time now by virtue of following our “MINT Perceived Target Rate” which lags the more famous Federal Reserve Target rate by 39 months, the estimated amount of time it takes for Fed policy to hit main street. Through this lens, we see at least 39 months of accelerating growth in the future. Once sentiment kicks in, the game will really be on, and the time to position oneself is now.

Is it time to jump back into real estate? Back in early 2013, Nadeem Walayat, at the Market Oracle gave this prognosis for the US Housing Market, which today is holding true to form, as most of Mr. Walayat’s analysis does.

One would do well to mind his final word of caution, do not make the mistake of leveraging oneself too far. If you do, you must time the exit perfectly, and who needs that kind of pressure? The inflationary mega trend to which he refers and our Key Indicators confirm will be with us a very long time, which means real assets trump money in the back any day of the week. The key is to stay liquid.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for August 29, 2014

Copper Price per Lb: $3.19
Oil Price per Barrel:  $95.08

Corn Price per Bushel:  $3.62
10 Yr US Treasury Bond:  2.35%
Bitcoin price in US: $508.89
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,287

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  6.2%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  17,103
M1 Monetary Base:  $2,732,600,000,000

M2 Monetary Base:  $11,406,000,000,000

Finance Smurf – A Post-2008 look at a Classic Graphic Novel

8/22/2014 Portland, Oregon – Pop in your mints…

In November of 1992 Pierre Culliford, a renowned author and illustrator published a graphic novel of tremendous gravity and startling economic insight.  The novel would be his last, as on December 24, 1992, Culliford suffered a heart attack at his home in Brussels and passed away the same day.

Culliford is known by his nickname, Peyo, and he was the creator of the Schtroumpfs, who are better known by their English name, the Smurfs.

Peyo’s final novel, Finance Smurf, at long last has an English translation which became available on July 1, 2014.

Seen through the lens of post 2008 skepticism with regards to the financial system that continues to hold the world in shackles, the novel seems especially timely, and the marketing copy on the back cover, which reads:

“99% of the Smurfs have left the Smurfs Village!  No one but the Finance Smurf wants to occupy the Smurfs Village!”

appears to be nothing more than an attempt to carry on the rallying cry of the Occupy Wall Street movement of 2011.  However, as one opens the cover and peers into the world of Peyo’s Smurfs, it is clear that the author intended to call into question everything the reader thought they understood about money, and in large part, he succeeded.

Occupy Wall Street Poster
“Wall-Street-1” by http://26.media.tumblr.com/tumblr_lsd8ucoCX91qbrgmdo1_500.jpg. Licensed under Fair use of copyrighted material in the context of Occupy Wall Street via Wikipedia – http://en.wikipedia.org/wiki/File:Wall-Street-1.jpg#mediaviewer/File:Wall-Street-1.jpg

While the Smurfs are, well, the Smurfs, and as such will invariably be forever adorable and highly entertaining in the eyes of most of humanity, here at The Mint we will look past the novel’s obvious merits of providing page after page of blue colored cuteness and highlight our observations of the merits of the economic arguments and questions that it raises as well as the metaphors employed via the roles played by long-standing characters in the following review.  Enjoy!

Finance Smurf

The novel Finance Smurf is set in Smurfs Village.  It begins with the incapacitation of Papa Smurf, the Smurf who keeps Smurf Village safe and orderly, who is laid up by a laboratory accident.  In this sense, Papa Smurf may be seen as a metaphor for a benevolent dictator or embodiment of a divine being for the Smurfs.  This is important, as it is the absence of the ongoing intervention of Papa Smurf in daily life that gives room for the mischief in the novel to occur (Smurf fans will quickly recognize this plot device employed by Peyo).

It then falls to Finance Smurf to seek an antidote, which takes him to the world of humans.  It is there that he learns the concept of money and becomes fascinated by it.  It is interesting that he does not appear to immediately recognize the creation of money as a means to enrich himself.

Indeed a hallmark of the Smurfs is the communist (or socialist) structure of their life in the Village.  Here at The Mint, we do not find this odd, as we have explored in-depth here at The Mint the fact that socialism is the norm in self-supporting economic systems the size of Smurfs’ Village who have a Papa Smurf, so to speak, as a universally respected authority figure.  What drives people to Capitalism is the need to tacitly make economic decisions in the absence of a universally respected authority figure, hence Peyo’s need to sideline Papa Smurf at the outset for the narrative to play out.

Finance Smurf returns to Smurfs’ Village with the antidote, as well as a burning desire to introduce money and the human system of trade to the Smurfs.  First, he reasons that he needs gold coins with Papa Smurfs likeness on them to use as monetary units.  He goes to Painter Smurf for the artistic rendering, Sculptor Smurf for the mold for the coins, Miner Smurf for the gold (Miner Smurf, ironically, has a pile of gold sitting there which he has no use for, as he is diligently extracting flint with his pick axe). Handy Smurf then melts the gold and makes the coins using the mold.

Here we interject another observation.  The day-to-day activities of the Smurfs are dependent upon their profession (or lack thereof).  In the absence of money the Smurfs simply do what they do.  There are rarely specific value judgments made with regards to what the Smurfs do, though all of their actions appear to be motivated by the needs of their fellow Smurfs and throwing the occasional party.  This system, while idyllic, assumes that everyone wants to maintain the status quo.  The maintenance of the status quo is at once the pillar of strength and the Achilles heel of Socialism.

It is clear that for Painter Smurf, Sculptor Smurf, and Handy Smurf, the requests of Finance Smurf are outside of the status quo.  However, being good Smurfs, they go along with it and hope for the best.

With the coins made, Finance Smurf calls a meeting of all Smurfs, introduces the concept of money, and hands out an equal share of the coins to each Smurf.  The Smurfs initially do not know how to operate in the new system, so Finance Smurf helps them by doing some back of the napkin costing analysis of their activities.  It is worth noting here that this activity is also the hallmark of Socialist systems, the central planning of prices.

As the Smurfs begin to trade, the predictable begins to happen.  The productive elements of society, Farmer Smurf, Handy Smurf, Baker Smurf, and so on, soon have more coins than they know what to do with.  They take them to Finance Smurf, who is now acting as the bank, to be invested.  On the other side, artists such as Harmony Smurf and Poet Smurf find themselves short of money and then mortgage their houses to Finance Smurf.  Lazy Smurf is hardest hit.

If it was not obvious to readers to this point, Finance Smurf begins to embody Central Banks and Wall Street.  At one point, Baker Smurf calls out Finance Smurf for lending at 10% but only giving him a 6% return.  In a nod to the foreclosure crisis, Finance Smurf becomes owner of all of the real estate in Smurfs’ Village.  There is a reference to privatization of public works, as when the bridge goes out, the Smurfs look to Finance Smurf to pay for the replacement, which he does in exchange for the right to collect a toll.  Even corruption is broached as there is some price-fixing for lumber on the bridge project orchestrated by Finance Smurf.

In short, Finance Smurf comes to embody everything that everybody hates about today’s financial system.  The rest of the Smurfs, fed up with the swift disaster that the Money system introduced by Finance Smurf has brought upon them, leave to build another village.  In this action, they take the only logical step in the face of monetary tyranny.  It is a wonder that more of us do not venture out and do the same today.

In terms of economic lessons to be taken from Finance Smurfs, there is little more to be gleaned.

The remaining Social/Political lessons are taught via the intervention of Gargamel, the Smurfs’ arch nemesis.  Gargamel counterfeits coins, echoing a form of economic sabotage employed by nations at war, and lures the Smurfs to them, relying on their newfound greed to be their downfall.  Fortunately, Papa Smurf returns and wisely guides the Smurfs away from the trap.

In another odd twist, Papa Smurf, once he becomes aware of the new Money system that has been introduced during his time of incapacitation, does not act to stop it, instead, he bumbles along with it as many a powerful emeritus would do, until the Smurfs ultimately leave to build another village, safely away from the scourge of money.

Conclusions

As an adult reading Finance Smurf in the post 2008 socio-economic landscape, one gets an eerie sense that Peyo was on to something back in 1992, and cleverly communicated it to the world.  While the ongoing economic analogies presented in the novel are quite clear, Peyo proves stunningly accurate in his depiction of Finance Smurf inventing money and introducing it to the populace, along with a monopoly on usury, for in this way Central Banks unwittingly enslave the world by promulgating the debt based money supply.

The Peyo’s final triumph is his clairvoyant depiction of the Smurfs’ unanimous decision to simply leave the village that was their happy home before it became the illegitimate property of Finance Smurf, and build another village just a stone’s throw away, yet with one marked difference; the absence of money and its creator.

True to form, the Smurfs reconcile with Finance Smurf who repents of his ways.  For Smurfdom, and indeed our world, was never meant to live under the tyranny of perpetual debts.  The Smurfs in Smurfs’ Village, who had a small-scale debt problem which quickly got out of hand, simply left and went elsewhere.  Jewish law called for a Jubilee, recognizing both the necessity of money and finance for large-scale commerce and the necessity of liberation from the snares that they created amongst what would otherwise be a brotherhood of man.  What, then, is the solution for an entire world living under the scourge of a 100-year-old debt based monetary system?

Following the Smurfs may not be a bad idea after all.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for August 22, 2014

Copper Price per Lb: $3.20
Oil Price per Barrel (WTI):  $93.50

Corn Price per Bushel:  $3.65
10 Yr US Treasury Bond:  2.40%
Bitcoin price in US:  $518.00
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,280

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  6.2%
Inflation Rate (CPI):   0.1%
Dow Jones Industrial Average:  17,001
M1 Monetary Base:  $2,694,800,000,000

M2 Monetary Base:  $11,393,400,000,000

Wall Street smells the wage price spiral

8/1/2014 Portland, Oregon – Pop in your mints…

Yesterday, the US stock market finally experienced mild selloff.  Finally, we say, because it had continued to rise even as the most recent series of crises in the Middle East flared up in conjunction with the downing of Malaysia Air flight 17 in the Ukraine conflict, which has become a flashpoint for deteriorating relations between Russia and the West.

Did investors just wake up to these crises and begin to fly to safety?

Don’t kid yourself, fellow taxpayer, the events above were actually bullish for the market.  In the altered universe that the use of debt as money for the past 43 years has created, destruction and war  = GDP growth + a population submitted by fear, afraid to ask for too much while others experience sacrifice.

When debt is money and destruction is growth, war is the ultimate boondoggle.

What truly has investors spooked at the moment, albeit mildly (despite what the headlines imply) is the continued march of evidence that the proletariat is now stepping up and demanding wage increases at an alarming rate.

Employment Cost IndexTake the Employment Cost Indicator above and add it to the  number of unemployed workers per job opening below and you come to one inescapable conclusion:  The Wage price spiral is upon us.

Unemployed workers per job opening US 2014The wage price spiral, that scourge of corporate profit margins which has been accelerating since March of this year (according to our unscientific calculations here at The Mint), has finally caught the attention of Investors, who in turn are selling on the off chance that the Federal Reserve will;

1)   Take notice and,

2)   Take action by increasing interest rates

To those who have been spooked by the selloff we offer a word of comfort:  The likelihood that the Federal Reserve takes action to raise rates in a meaningful way is slim.  Assuming they were to raise rates, any action at this point would take at least 39 months to matter, crucify fixed income in the short term, and trigger large scale bankruptcies the likes of which they have spent the past 5 years trying to mop up.

However, even if the Fed had the desire to raise rates they would be unable to do so.  They have lost any meaningful control of the traditional rate mechanisms through an incomprehensible mix of monetary policy (think Quantitative Easing) and regulatory action (chiefly Dodd-Frank) some time ago.  All they have left us rhetoric, which is increasingly falling on deaf ears.

Reality is far removed from Washington DC and Wall Street.  There are very large piles of money that are on the fence between seeking safety and return, and that pile is growing faster by the minute.  The bigger it grows, the greater the likelihood that it will be deployed at a lower risk adjusted return.  The decrease in returns = increased wages to the proletariat as the pendulum swings the other way in world’s socialist monetary system.

The wage price spiral is here, and it is about to make a hot mess of markets everywhere.  Ask for a substantial raise or find another job, especially if you are in an industry with ultra-tight demand for labor.  You are likely to be pleasantly surprised.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Key Indicators for August 1, 2014

Copper Price per Lb: $3.22
Oil Price per Barrel:  $97.39

Corn Price per Bushel:  $3.55
10 Yr US Treasury Bond:  2.52%
Bitcoin price in US:  $598.00
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,293

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  6.2%
Inflation Rate (CPI):   0.3%Dow Jones Industrial Average:  16,498
M1 Monetary Base:  $2,825,900,000,000

M2 Monetary Base:  $11,348,900,000,000

Negative rates and the no bid Repo: It’s not your father’s overnight funding market

7/14/2014 Portland, Oregon – Pop in your mints…

A great deal has occurred since our last correspondence, most of it bad news for what passes today as monetary policy.

Fellow taxpayers have no doubt noticed that our once faithful correspondence has been less than faithful over the past several months. While explanations amongst chums the likes of which we have become are unnecessary, we offer a brief glimpse as to how The Mint has been spending his precious time as of late.

For starters, we have been frantically reconstructing 2013 and making various systems upgrades on our most recent assignment. Now that the work has been done and passed audit, we are moving through regular compliance reports and are about to begin the second part, (our personal favorite) of our not quite patented one/two accounting and treasury systems overhaul: The treasury overhaul part of the program.

Here we digress into what we consider our unique philosophy on data processing with regards to accounting information systems. If you could care less about such matters, please scroll to the next bolded heading to return to

A mere 11 years ago, we considered ourselves an accountant. We acted like an accountant, worked like an accountant, even smelled like an accountant (if indeed accountants can be said to have a smell about them.

Then we went to Spain, and had nothing short of an epiphany, which is as follows: Real business people could care less about proper accounting, they simply want the accounts collected and the bills paid, a steady stream of cash in the bank, and they want to get real-time financial metrics which will let them both know how their past decisions have fared and, more importantly, allow them to make better decisions about the future.

With this epiphany fresh in our mind, we realized that most accounting systems, while built by programmers to serve the business person, had been hijacked by accountants when they were set up, in most cases rendering the information the business person was to receive subject to seemingly infinite torture by the accountants before it could be presented, at which time the information was neither timely or useful to the business person.

With this realization, we developed our two-step approach to assisting business people in reclaiming their accounting data. The first step involves ensuring that the accounting system they are using is both adequate (it may come as a shock that many companies pay too much for systems that are no longer a good fit for them) and set up to capture and report the business’s financial data in a way that facilitates high level decision-making.

The second step involves addressing the issue of the timeliness of the data. We realized that in a great majority of transactions, the bank received the data before the accounting department did, and much valuable time and effort was wasted by waiting for the accounting department to input data into the accounting system, much of which was provided by the bank rather than internal sources, and then reconciling the system to the bank statement. The entire process was backwards, so we decided to perform data processing directly in the banks’ treasury management systems, where the transactions are initiated, approved, and executed, and have the bank data be easily uploaded into the accounting system, where it can be matched with vendor and client data and properly classified.

There you have it, it is much easier said than done, but once our program is complete, most companies we engage can get by with half of the accounting/fiscal personnel they had before, get their data in a timely and coherent manner, and usually end up saving money on their systems to boot.

In any event, between earning our daily bread in the above manner, watching the World Cup, and editing a taxonomic paper on Central American land crabs (which can be seen here: http://biodiversitydatajournal.com/articles.php?id=1161), we have been following the disintegration of the debt based currency system from a comfortable distance. Our observations on the most recent ruptures follow:

The No bid Repo: It’s not your father’s overnight funding market

In the late 1980’s, the Federal Reserve had just begun what would be a series of automatic bailouts to the larger financial system. After Black Tuesday in 1987, it became clear to most sober observers that the Fed would do everything in its power, which at the time was limited to rigging short-term interest rates, to ensure that financial markets remained liquid at all costs.

Perhaps not coincidentally, in the late 1980’s, Oldsmobile ran a series of commercials with the tagline, “it’s not your father’s Oldsmobile,” which seemed to be a vain attempt to minimize the “Old” and emphasize the “mobile” part of its name. In case you don’t remember how exhilarating it was, videoarcheology.com brings it to life for us once again:

What did the strategy of the Fed and the strategy of Oldsmobile have in common? They both assumed that demand for their product, no matter how unappealing it was, would be infinite. Oldsmobile gave up the ghost in 2004, maybe people did want their father’s Oldsmobile after all.

The Fed is still hard at work, but their product, the debt-based currency used by most financial institutions in the United States and indeed throughout the world, is going the way of the Oldsmobile.

The Federal Reserve got by for nearly 95 years by monopolizing the ability to provide something for nothing, something that appealed to governments, companies, and consumers alike. They substituted debt for money, and in the process opened up a world of possibilities never before fathomed.

The plan went well, people began to circulate the debt in place of money, with those closest to the Fed paying the least and those furthest way paying more, and people toiled day in and day out to move further up the food chain.

Sure, using debt as money left the occasional sinkhole in the economy, on those rare occasions when more debts were being cancelled than issued, but the Fed simply lowered interest rates to provide adequate incentive for people to demand more debt, lowering the perceived price of getting something for nothing.

Now, circa 2014, the Fed has lowered interest rates to zero and has taken the extra step of creating even more debt of its own to circulate. While things should be going gangbusters at the Fed factory, we open the pages of the financial news to find that:

a) The Fed can no longer control the interest rate mechanism as it did before and;

b) The Repo market, which funds $1.6 trillion in short-term loans every business day, is going no bid on an increasingly regular basis thanks to the 2010 Dodd-Frank Act, which was supposed to fix these sort of problems.

{Editor’s Note:  For a primer on the Repo Market, read this paper by the NY Fed:  Key Mechanics of the U.S. Tri-Party Repo Market, we dare you}

The Federal Reserve’s debt based monetary system has reached its theoretical limit. While the ECB has toyed with the idea of negative interest rates, the US market, specifically US Treasuries which are sucked into the Repo Market nightly, is rendering negative rates on its own, and the Fed is powerless to stop it.

In layman’s terms, the game has flipped on the Fed, and now people and companies are essentially saying “lend me $100 today, and I’ll pay you back $97 in a year and we are square.” Crazy as it may sound, this is the reality on the fringe of the credit markets, and it is the price of continuing to deal in a debt-based currency that is passed its prime.

Let’s face it, Oldsmobile wasn’t cool in 1988. They had tinkered with it to such a degree that it would never again be your father’s Oldsmobile, and that was not a good thing. In the same way, between QE, Operation Twist, and near zero short-term rate targeting, Ben Bernanke has so severely mangled the Fed’s balance sheet with his tinkering that maintaining the integrity of the US dollar and US Treasuries as any sort of measure of reliable benchmark is all but impossible.

Now, the engine of the Fed’s debt based currency is beginning to lose speed via negative nominal rates, and Janet Yellen is looking into the toolbox, only to realize that Ben left most of the tools rigged in the engine of the Fed’s Balance sheet, and that moving any one of them will cause a catastrophic failure of the currency. Not to mention that long-awaited, highly inflationary wage – price spiral is about to kick in.

Academic economists will one day struggle to explain what is happening now, while inflation rises, interest rates continue to dip further, going negative at the top of the financial food chain, and the Fed is left with nothing but rhetoric with which to attempt to execute monetary policy. This is likely to get ugly and, if possible, defy the laws of finance and perhaps even mathematics before the game is up.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for July 14, 2014

Copper Price per Lb: $3.25
Oil Price per Barrel:  $100.51

Corn Price per Bushel:  $3.78
10 Yr US Treasury Bond:  2.52%
Bitcoin price in US: $618.00
FED Target Rate:  0.09%
Gold Price Per Ounce:  $1,339

MINT Perceived Target Rate*:  0.25%
Unemployment Rate:  6.1%
Inflation Rate (CPI):  0.4%
Dow Jones Industrial Average:  16,944
M1 Monetary Base:  $2,961,000,000,000

M2 Monetary Base:  $11,284,500,000,000