Tuesday, September 29, 2009

Social Mood Conspiring To Halt Reflation Attempts

It is happening around the world. Populist anger directed toward the financial industry (the creator of inflation) is forcing politicians into uncomfortable positions of austerity just as the politicians congratulate themselves for "saving the world." Social mood, an unstoppable force in both directions, is getting the better of what has almost unquestioningly been referred to as "the recovery."

Paradoxically, there are very few who actually want a recovery. I don't. None of my close friends do. Not if it means another bout of asset speculation, inflation and the degradation of social values that go along with it. As such, few of us are complying with the attempts to reflate. Most are unknowingly putting the kibosh on central bankers by resisting lower interest rates, saving, waiting for lower asset prices, and simplifying their lifestyles.

This is a process - a slow one - so it is not easy to put one's finger on. But where emotions run deepest (politics) we can see the changes clear as day.

Three weeks ago in Japan, the DPJ (Democratic Party of Japan) defeated the LDP (Liberal Democrat Party) handily. It was the first LDP defeat in decades. The DPJ intends to "overthrow the ancient régime locked in old thinking and vested interests, solve the problems at hand, and create a new, flexible, affluent society which values people's individuality and vitality." They claim, "the bureaucracy of the Japanese government size is too large, inefficient, and saturated with cronies and that the Japanese state is too conservative and stiff."

Japanese voters may not know it individually, but collectively they are saying, "we are sick and tired of your attempts to reflate the economy for your own benefit, without regard to the unintended consequences." As such, they voted for a party that promised the ability to make more economic decisions at an individual level, rather than via the central planning bureaucracy.

Whether or not the DPJ acts on any of the above is conjecture. Social mood in Japan is forcing the government into a "strong yen" policy that benefits individual Japanese, rather than large multinational exporters.

Meanwhile, over in Germany a nearly identical shift occurred in their election. The FDP (Free Democrat Party) took a large chunk of votes from the SDP (Social Democrat Party) and will now be the keystone in a coalition with Angela Merkel's CDU. The FDP are best described as "classical liberals" or libertarians. They increased their vote totals by nearly 50% on a platform of reduced economic intervention, lowering the public debt and lower taxes.

Once again, we see voters rejecting the inflationary tendencies of big government. Both the Japanese and Germans dislike their excessive dependence on foreign exports. They both elected governments that disavowed subsidizing exporters at the expense of domestic producers. Political pundits will inevitably paint this as some sort of shift toward "right wing" or "isolationist" tendencies. These are both meaningless terms. Social mood has simply changed. They rejected inflationism.

And yes, this is slowly happening in the US as well as elsewhere to be sure. The Federal Reserve has the lowest approval rating among all US agencies (even lower than the IRS!) The Federal Reserve Transparency Act (better known as the Fed Audit Bill or HR1207) is gaining momentum and is sure to pass in one form or another. Last week, congressman Alan Grayson publicly lynched the Fed's General Counsel Scott Alvarez.

But most revealing is the continued reluctance of the FDIC to tap their credit line with the US Treasury, instead deciding to charge member banks nearly $50 billion in fees. Apparently, getting one's hands on ungodly sums of money is not as easy as it was 6 months ago when news of the government doling out $100 billion for this or that was a near daily occurrence. There are real concerns of a further increase on the government's debt ceiling to be rejected by congress. Populist anger toward the lack of fiscal restraint has put pressure on congressmen and women to think twice before casting a 'yay' vote in favour of anything. Midterm elections are coming up in just over a year. And true fiscal conservatives (ie. Libertarians) like Rand Paul and Peter Schiff are raising big money to fight profligate spending tendencies in Washington.

The three largest economies in the world are slowly experiencing the above mentioned shift. Where inflationary fiscal tendencies of governments have been succeeding, they are now coming under attack. This is in addition to the massive failure that monetary inflation has had since the crisis began. Inflationists continue to believe that both governments and central banks can create inflation at will, while in reality we see that neither can without the complicity of a risk seeking behaviour in banks and individuals.

People's attitude toward debt and speculation has changed. As the process intensifies, debt revulsion will accelerate until frugality itself reaches a level of unsustainable extremism. By the time it is widely understood it will be over.

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bbenson said...

I've been wondering why the FDIC was thinking of doing such weird things to solve their funding problems when they already had a line of credit with the treasury. Makes sense.

Occdude said...

Great article Matt, especially your allusion to deterioration of moral values during periods of speculative excess.

The best case scenario for us would be a deflationary one. By "US" I mean John Q. Public and not the oligarchy.

If the government does not embrace inflationism writ large, then the only out left is default, which as painful as it is in the short term, would literally shock the crap out of us and get us back on track.

The only thing stopping that move though is politics. This country is no longer united, it is factionalized, a condition the founding fathers both dreaded and warned against. Without the common carrot of economic prosperity, factionalism will run rampant and I do not think the United States will remain United (splitting up mainly along Red/Blue state ideological divides).

So, I agree that deflation is where we need to go and where we will eventually end up. But it is gonna be a long bumpy and scary ride with bouts of both deflation and desperate inflation before capitulation wherever that eventually takes us.

Its ironic to see how both the Germans and Japanese have dabbled with inflation with very different outcomes. It proves the theory that sometimes expansion of the money and credit supply can have deflationary effects in the overall economy if credit outpaces money as has been the case for about 20 years or so. Still it bears mentioning that even though the politics NOW are becoming more thrifty, when deflation really kicks up, people will be screaming for inflation, especially the boomers as they see all the promises made go up in smoke.

Roger J said...

Singer Andy Williams is calling O-man following Marxism & trying to turn the US to a socialist country.

Well... I gotta agree w/ him.

O-man looks more and more like a neo-com (as in "communist").

ViewFromTheSouth said...

This is not communism/Marxism but an Oligarchy or a soft Fascism.

There is just way too much direct control over the government by the rich/ well connected and the large corporations for this to be called socialist.

Matt Stiles said...

"Corporatism" is the best word to describe our sociopolitical system.

Socialism, Capitalism, or social democracy are all misused terms in today's world. And in my opinion they are used more to mislead than to describe anything coherently.

If a literate martian were brought to earth, told to read political commentary, and then asked to define any of the above terms, it would be impossible to do so.

Matt Stiles said...

Great article Matt, especially your allusion to deterioration of moral values during periods of speculative excess.

Most critics of capitalism refer to this degradation as an inevitable side-effect of the "profit motive" of greedy capitalists. In fact, essentially all of these negative side effects are caused by government and central banks themselves - the polar opposite of capitalism.

As I mentioned above, "inflationism" is confused as a characteristic of "free markets" while the two are actually polar opposites, unable to coexist.

Roger J said...

So, what do you say about today's action, Matt? I guess the most convincing move down we have had in months?

Specifically, I'd like to mention:

1. SPX crossed 1039.47, which puts more credibility to the scenario that we are on the so-called P3. The remaining count suggesting we're in P2 is to have the move from 991.97 to 1080.15 as minute [i] of C of P2. That will be taken down if and when we breach 991.97.

2. All major indices broke the uptrend line made from March lows, with Dow Transports leading the way since yesterday.

3. Convincing breaks in the momentum indicator uptrend lines will also likely be found at the EOD.

4. VIX broke the down-trendline convincingly. On the weekly chart, there's a good chance it will close above the BB 20, the last time it did was December 2008.

5. JNK, LQD, HYG are plunging hard today, some 3%. That's huge 1-day move for bonds.

6. The dollar & treasuries are up nicely.

Of course, we always have to be ready for unexpected move up. I remember not so long ago I posted lists of evidence like this on this blog before... and I was proven wrong. Commodities are still holding up well today. Maybe the last thing they can jack up? I see $WTIC is backtesting the uptrend-line that was broken at around 68.

However, it seems the weight of evidence how has tipped towards a reversal. What do you think, Matt?

amigauser said...


i will have to disagree with you, both Germany and Japan are net creditor countries, so have more to gain by controlling their money supply, but U.S.A is a debtor country and so will inflate its debts away, just like all the other countries have

Matt Stiles said...

U.S.A is a debtor country

Things change.


I'm operating with more conviction for most of the reasons you cited and am quite heavily short ATM (via puts in solars and indices).

However, we are only down 1.4% on the week (basis SPX). A little bounce could turn into a big one if it looks like a positive week is in the cards. As mentioned on the weekend, two consecutive days like today would be a change in character. Ideally, we'd see a 90% down day too.

The most bearish situation I can dream up for tomorrow would be a decent jobs number that pops the tape in the pre-market but gets sold hard at the open.

Willy2 said...

Interesting article. Yes, the social mood is changing and it will change the way people behave but I don't fully agree with what Matt writes here. I see things a tad different. Matt is overstating the wisdom of voters.

"Germans and japanese dislike their excessive dependence on foreign exports". Who told you that crap ? People couldn't care less. As long as there's enough employment for the people then both business and workers don't care whether the products they're producing are exported or not. Whether they're producing cars for the export (Germany) or bombs to be used in e.g. Afghanistan (US). Whether those products are subsidized or not.

In Japan they had two "lost decades" and the japanese people are fed up with the LDP who ruled for more than 17 in the last 19 years. They blame the LDP for their current economic woes. And the current downturn simply added the final number of straws that broke the back of the camel called LDP in the elections. IMO, Japan voted against the LDP, not in favour of the DPJ.

Although the DPJ senses that the winds are changing and that Japan must focus (more) on cooperation wiht asian countries and less with the US.

"Social mood is forcing the government into a strong yen policy". Sheer nonsense. It's simply a matter of financial survival for Japan. Japan WILL - sooner or later - be forced to sell its US T-bonds in order to make a chance to survive. And that selling will push the yen up against the USD. And that doesn't bode well for the average japanese citizen.

What went on Germany is more general shift to the right in economic challenging times. And that's happening not only in Germany. I don't consider it to be a protest against the "inflationary tendencies of big government" yet.

"Protest against inflationary tendencies". Again sheer nonsense. The folks in the US are simply fed up with the fact the Gov. spends giant amounts of money to bail out their friends from Wall Street and the high(er) taxes that will be the result of that.

The Obama administration is aware of the current protests against those giant spending programs and the taxcosts. Did you notice that the US general for Afghanistan (McChrystal) wants more US troops (45.000) deployed over there but Clinton/Obama are reluctant to give in to these demands. They know the US people opposed the bailout of Wall Street and now are very reluctant to provide those extra troops because they fear the opinion of the US taxpayers. But in the end the US IMO will send those extra troops.

It seems the politicians ARE waking up.

Matt Stiles said...

Who told you that crap ?

Germans did. I lived in Germany for 6 months last winter. They don't like their major industries being held hostage to the whims of foreigners and taking paper in return. They'd rather have an even trade balance. Alles Klar?

Sheer nonsense.

May I suggest you do a little reading on socionomic theory.

The government and central banks are the biggest sheep of them all. They are classically late in determining trends and poor in understanding them. On a case by case look, it may seem that "the economic gods" control the markets. But in the greater scheme of things they are beholden to the whims of society's collective want - something that is always in flux.


Mike said...

Matt, very good point about the government being the biggest sheep of all. In the long run I agree that they cannot control the business cycle, but their misguided policies have nonetheless contributed to a lot of the problems in our economy. On a related note, I just read a really interesting article at http://www.goldalert.com/stories/Gold-Price-Up-Dollar-Down-Does-it-Really-Matter that provides a great overview of the government's role in the economy. It specifically talks about the history of monetary policy in the US, and the Fed's role in debasing our currency. It also discusses the relationship between the dollar and the gold price, as well as potential investment implications for these assets classes.

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