Radio Show Notes: Repairing a Tesla with a horse-buggy manual

Thursday, July 13, 2017 // Written by Enzio von Pfeil
Central bankers are fighting yesteryears' wars: inflation bouts.  They run the risk of making severe policy mistakes which could trigger a market crash in 4Q17


  1. Fed beige book reports growth in all 12  regions although Yellen now sounding dovish on rate hikes
    1. Yellen comes across like your British PM: Ms May-”BE”
    2. She strikes me as timorous, as scared to come out with a simple, clear view; just listen to her testimony today!
  • On 14th June, she said that the reduction in inflation was due to “one-off” factors in prices of mobile phones, telecoms and pharmaceuticals
  • But this time around, she voiced more profound concerns about long-term, i.e. structural deflation…
    • given her “new” view of structural deflation, she now is sounding more dovish on rate hikes. So what’s behind her fears? 2/3 psychology and 1/3 outdated thinking.
  • Psychological.  Looking at her handwriting, it reveals a very scared individual who constantly qualifies herself in order not to offend. She probably had a very strict upbringing and thus became a “people-pleaser”
  • Her job.  I would not discount her fear of losing her job if Kaiser Trump so decrees!  The Kaiser wants soft rates in order to keep the economy chugging along – and, guess what, this “suddenly” is what Yellen wants, too!
  • Outdated framework.  Next to these two psychological drivers, let the facts speak for themselves: she is repairing a Tesla  by using a 19th century horse-buggy repair manual!
    • This goes to say that her mindset, the framework within which she thinks, is as old as she is: 70+!
    • That framework is driven very much by that Kiwi invention, the Philips curve. Simplistically, it states that when labour markets tighten, wages rise and thus, inflation takes off
    • But now we have a new paradigm: tighter labour markets AND no wage inflation!
    • How so? Technology and globalisation mean that ever -more demand can be satiated at cheaper costs – whether by installing automation or by outsourcing to Emerging Markets..
    • èno wonder Yellen keeps flip-flopping: she thinks that she can repair today’s Tesla  by using a horse-buggy repair manual, when, in fact, other tools are required to keep growth and thus job creation chugging-along.

  1. Eurozone industry has had best month since last November
    1. This reflects an improvement in Europe’s Economic Time®: she used to have an excess supply of money because of her excess supply of goods
    2. But that persistent excess supply of money  (driven by balance sheet expansion and low rates) has begun creating  an excess demand for goods
    3. Thus, producers are grappling with two happy problems
  • How to re-stock inventories and
  • How to satiate rising demand
  1. This “double header”  of re-stocking of inventories along with satiating rising demand will continue running, meaning that the outlook for European corporate earnings must be improving (higher revenues and higher margins)

  1. China credit growth is strong
    1. For many moons, we have been suggesting that China’s Economic Time® has been the opposite of America’s:
  • Whereas the US and the G3 have had an excess SUPPLY of money, the Chinese have been creating an excess DEMAND for money by virtue of reigning-in money supply growth, and thus, inter alia, credit creation
  • So why this sudden pick-up in credit growth – when the overall debt landscape of China is worsening, not improving?
    • The key reason has got to be this Fall’s Party Congress, one in which Xi will seek to consolidate his power even more. But he can do so only by showing that he is fulfilling his “mandate from heaven” – adequate job creation.
    • è so he has told the PBOC to open the credit spigots.

Global Markets

  1. Dow at record high – within 12 points of its all-time peak!
  • A key reason is that markets feel that now, Yellen won’t be in rush to tighten monetary policy: after all, inflation is below-target
    • èthus real estate was one of the prime market movers: property stocks like soft interest rates!
    • The other mover was – un-originally – technology, although it is tough to find specific macro drivers of tech stocks.
      • Indeed, technology  – along with globalisation – are fundamental macro drivers themselves, as we discussed above!
    • My view remains consistent: in real  terms - that is, inflation adjusted terms – the Fed’s tightening will choke America’s skin-deep recovery; the market will discount this come 4Q17 and there will be a crash.

  1. Eurozone markets best day in 10 months (apart for French election day)
  • Here, the obvious driver must  have been that strong industrial production data which we discussed just now.
  • The other one has to be that timorous Draghi does not want to reduce his ECB balance sheet to dramatically; this means that European monetary policy remains dovish. As we disciples of our Economic Clock® know, financial markets live off an excess supply  of money!
  • Finally, from a sector perspective, it was builders and energy that led the pack. As in the US markets overnight, real estate likes low interest rates!


  1. Hang Seng above 26,000 – a two-year high
  • Here, the  catalyst must be China’s change of tack –to a gradual creation of an excess supply of money – as discussed before, by opening up her credit spigots ahead of that 19th Party Congress this Autumn…
    • Indeed, the Central Bank’s infusion of short-term liquidity this week was the key catalyst.
    • Thus, banking stocks led that upward drift in our Hang Seng Index.

  1. General observations on Central Bank confusion and markets
  • The old business cycle model of an excess supply of money leading to an excess/ rising demand for goods has worked yet again. So far, so good for our Economic Clock®
  • The next logical step in the business cycle should be that the excess demand for goods leads to (wage-push and thus demand-pull) inflation. This is what Central Banks fear, and that is what prompted the Bank of Canada to raise rates for the first time in seven years.
  • But this next logical step is not happening: we are seeing stronger demand AND lower inflation.  Our reasons for this paradigm shift are twofold”
    • Globalisation means that companies can outsource production to the  less costly Emerging Markets, and
    • Technology means that unit labour costs decline on account of stronger productivity.
    • Until Central Bankers – and, thus, markets – embrace this fundamental shift in paradigms, they will keep
      • Being confused, and thus
      • Making mistakes, i.e. tightening when they should NOT be; all of this boils down to policy overshoot that chokes nascent improvements in the Economic Time®
    • è Market outlook. Based on Central Bank Confusion, markets remain brittle, a bit like deer staring into the headlights of an oncoming fourth quarter crash, courtesy of Central Bank Confusion.

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