New Year, old financial repression

A new year always leads to analysts touting market gains. They are usually wrong. They probably will be again in 2013

What goes up, must come down. But will it ever go up again?
Daniel Lacalle
On 8 January 2013 13:01

As has been the case at the turn of every year since I started in the financial services industry, all banks and analysts expect market gains throughout the year. So will we see global recovery and an improving economy in 2013? No, unfortunately.

The market expects another two billion-plus of scam stimulus policies.The last conference given by Ben Bernanke, Federal Reserve governor, basically came to say "another day, another $283 million down the drain". And as with Monopoly money... it's gone.

Financial repression version 2013 and nominal GDP targets

More government debt, very low rates, more taxes, less disposable income, more money printing, less value of money, more inflation. And as the formula has not worked so far, and the economy is getting worse, so now we hear that central banks should aim their policies at "nominal GDP growth."

What does that mean? Well, freedom to print and intervene in the money market even if inflation soars, because the goal is to create nominal GDP growth - not real, i.e. inflation-adjusted. No matter, if you see prices skyrocket, the important thing is to continue to maintain the illusion that we can grow the economy of an OECD that will increase its debt by $2.5-3 trillion in 2013.

Despite the fact that the results are entirely unconvincing, the printing press and tax-raising machine are well oiled and that means that our governments and their central banks will do everything possible for you to panic. Seeing as your money is worth less and will earn less interest (or disappear through taxes) this will force you to invest, take risks, buy houses, and shares.

"We are here to support if things go wrong", they will say. Until they don't of course, because the weight of the burden is too large. Or, as has happened only ninety times in the past fifty years, central banks have to attend another sovereign debt hole.

So let’s be clear about the goal and let's be aware that is not supported by fundamentals. And once we acknowledge that what is sought is to keep debt afloat, high prices, and growing this huge bubble, let’s make good use of it. 

If we play bubbles, commodities, stocks etc., remember to sell in February, because if you think that 2012 has been a volatile year, I see it only worse in 2013. This market is a good bet and a bad investment.

Crisis year seven: This is not a crisis, it is a total change of cycle.

This is a cyclical change, not a dip. It will be for many years. An orgy of debt over a decade is not resolved in seven years in which the circus has not dropped the curtain.

Monetary injections and low rates do not help the needed deleveraging or allow the cleaning of unproductive sectors, thereby changing the model to areas of high productivity; long-term real investment is distorted and delayed. Would you invest for the long term in a highly indebted model where there is no confidence in the three most powerful forces in the system: banks, governments and legislation?

Therefore, be careful betting against interventionist forces that have more money - even if its fake, created out of nothing - than all investment funds in the world. Beware of dependency.

In the law of this state casino, which compels you to throw dice but does not let you get your money back because it is confiscated at the door, is where the trap lies.

All governments, companies, and central banks are entities that react to past events. They don't carry out proactive strategies. And the consumer knows it. Until we see consumption rise strongly - and in periods of financial repression this is very difficult - all movements of stock markets and risk assets-commodities will be aggressive, volatile, and short term .

But the trend of contraction will continue in the medium term. There is no real investment and without the consumer, and confidence, this pyramid scheme does not work. And I fear that consumers are already very chastened to hear that "this time it's different" and that "there will be growth in 2014." Consumers will not accept promises, but realities.

True, this interventionism raises prices and lifts the multiples of ​​listed stocks, but results and margins stagnate. And since everything is driven by fake money, stock and debt markets suffer expansive and contracting shocks in very short periods.

More debt than ever

In 2013 most OECD states will plunge into more debt, despite the imperceptible "austerity".

The United States will increase its debt ceiling; the United Kingdom will continue the process of moderate spending and devaluing currency, but with a solid financial balance, all central banks will continue to increase exponentially their debt, now without sterilization . 

Of course, we pay for it. And when one of the largest investments in the global economy, monetary stimulus, is used to keep state debt and finance current expenditure, the hole gets bigger.

Can you imagine how quickly we would have exited the crisis if the injected money had been used to finance investments by private companies rather than trying to maintain prices of risky assets and sustain obese states?

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