Friday, August 22, 2014

Forbes Article: Hotel California

Hotel California

Original article on Forbes Espanol:
By Ethan Michaly
Although the Federal Reserve is near the end of its latest round of flooding the market with money (more elegantly called QE, but plainly speaking printing green paper; which has hypothecated future generations of the country by an un-payable debt for decades, achieved a miserable growth since 2009, generated the worst income distribution in modern times, managed an increase in employment but at much lower salaries, inflated the largest credit bubble in history, created an equity market madness in which a very low percentage of the population is involved but still doubles, triples and quadruples in value), it is unlikely that they can afford to discontinue that policy for long. In fact, rather than start raising interest rates soon, it is much more likely to develop a new system for printing in months. If the American economy is growing at below 2% due to printing, imagine what would happen without it.
For decades Japan has been in QE and Mr. Abe decided to make a pop artist career by a creative mega-print campaign that had such a lasting effect as a 100-meter dash; Japan's economy has returned to negative territory and so-called "three arrows" of his plan will soon be replaced by the entire storage of Robin Hood's arrows. In summary, they can't and will not stop printing.
Europe, which had resisted the temptation of this sweet drug for a while, through austerity measures that have resulted in a relapse into recession and the bursting of another island and financial institution, finally is ready to embark on this wonderful journey of dropping money to the streets from a helicopter (famously mentioned by Mr. Bernanke prior to his inauguration as head of the Federal Reserve US).
This experimental path that has been taken and so praised for avoiding a larger catastrophe since 2009, which has generated a ridiculous amount of money globally, lacks any kind of exit strategy. Even by admission of Nobel Prize economists: what we do not know is how to reduce the amount of paper and go back to something more reasonable. The Fed is experimenting with these gradual reductions but I have bad news: like the lyrics of the famously acclaimed Eagles song:

Welcome to the Hotel California
Such a lovely place 
Such a lovely face
Plenty of room at the Hotel California
Any time of year 
You can find it here


Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave!

Saturday, April 19, 2014



Suppose you are flying a Jet with  thousands of tons of cargo, trying to fly like a glider driven only by the wind. Rather difficult task, don't you agree?

Now, imagine an economy that has been inflated with trillions of dollars just to stay afloat, trying to stay in course with a declining amount of cash flow.

Is it possible for developed economies such as Japan , the U.S. and the European Union to achieve a landing with the withdrawal of all injections of adrenaline they have received since 2009?

The U.S. Federal Reserve is trying to make it, as it did on previous occasions that proved a failure : stopping the QE (printing money) , this time in a gradual way during a pre-set amount of months to see if the economy U.S. is able to sustain itself on its own feet, forgetting that the market is completely interdependent with the world economy, which in turn is in a fragile state.

As I mentioned in previous columns , I seriously doubt that the FED will even end the stimulus program and rather reverse the course , trying to re-accelerate the printing press. And the U.S. economy can not achieve a soft landing after the unprecedented amount of paper money circulating back through the financial system . It is only a matter of time before the markets get hit by the retiring of the intravenous injection, giving the Fed to have an excuse to backtrack .

Japan is going in the opposite direction trying to avoid the downturn with increasing propulsion (a time bomb waiting to explode), and Europe is already warming up.

The withdrawal of stimulus is causing a rise in U.S. interest rates and a consequent appreciation of the dollar , deadly formula for that country has been paying his debt by systematic depreciation of its currency. Also the gradual loss of it's political global power has taken a toll on commercial relationships, therefore undermining the currency.

Looks like a good time to buy bonds of medium duration in dollars ( and high quality) , since surely its recent price drop will be reversed in the short term . The U.S. can not achieve a soft landing with such a heavy fuselage.

Wednesday, March 26, 2014

Article on Forbes: China, Myth or Reality

Link to Article in Forbes

China: myth or reality?

Foto: Reuters.

Photo: Reuters.
The spectacular growth of China's economy is a reality, but it is a myth that may single-handedly save the world economy.
China, a country with a population of 1.3 billion population, 8.22 trillion economy that recently has been lowering its growth from 11% to almost 7% . Credited as being the current engine of growth for the world economy, the superpower of the future. So much so that many parents in different parts of the world want their children to learn the language that will help them to understand this culture that will dominate economically for decades.
Some interesting facts only for ease of reference: India has more than 1,200 million people and its current population is growing at a rate of 1.3% per year versus a 0.5% a year in China. Even so, the economy of India is only about 20% of the Chinese in size. As counterpart, United States has only 300 million population, but an economy of 15 billion dollars and the EU has 500 million population and a 16 trillion economy.
In short, China has 19% of the world's population, but 12% of global GDP, while the US has 5% of the world's population, but a GDP of 19% of the world and the EU 9% of the world's population, but a GDP approximately 20% of the global economy. Yet the weight of the EU, US and Japan represent a majority and significant percentage of the world economy. And in all three cases it's economies are struggling with a level of astronomical debt, rates of dismal economic growth and with deep problems of structural level. And it is unlikely these economies in the short and medium term will achieve a reasonable takeoff, given massive internal and external debt servicing that prevent a sustainable recovery.
Another aspect to consider with respect to China as an engine of growth is that the great economic expansion of the last two decades had not so much to do with the size of its population, but with the economic opening and the adoption of the model of global trade and a "controlled" version of new capitalism. China became the world's industry, with a cheap labour and flexibility for mass production. It became the country of exports by excellence, and thereby increased the purchasing power of a large part of the population and an enrichment of the coffers of the State, which finally resulted in a significant investment in infrastructure and consumer goods imports.
The commercial and fiscal surplus generated a number of astronomical reserves which were exponentially increased via a currency not tradable on international markets and a very competitive fixed exchange rate. While developed economies were devoted to borrow and consume, China dedicated to save and produce.
However, the lethargy of the world economy from the shock of 2007-2008 has been slowly diminishing the rate of growth of Chinese exports, which is has been translated also in a reduction of its growth rate. The decay of the net flow has been compensated in the past decade with an explosive growth in domestic credit by Chinese banks and financial system (see graph).
Source: World Bank (domestic currency).
In other words, the miracle of China's growth over the past decade, in particular, has been also by an explosion in consumption and spending on real estate and infrastructure, financed in an important part by domestic money creation. This in part also to meet the appetite of consumption and capitalism of the new Chinese citizen.
But as we've discussed in previous columns: the experience that is today evident in the developed world, is that growth via credit is a formula that can only turn badly when it is used excessively. And the performance of the additional credit begins to become marginal, as it is the proven case of the formula of printing of Japan and US. Of course unlike these, China has a significant amount of reserves, but those are in foreign currency and not necessarily on liquid investments. For this reason, it is presumable to think that Chinese finance could resort to the rescue of their financial system, but with that (as well as EU and Japan) it would only somehow cover the hole in the floor, therefore failing to kick start the economy again. Sooner or later the credit excesses will end up being paid somehow.
With anemic growth on the world economy and the impossibility of continuing to expand the domestic credit at previous rates, it is likely that China is destined to grow at an increasingly slower pace, with the consequent impact on the world economy which still relies on a fragile structure.
China is a reality, but that it can save the world economy is a myth.

Monday, March 24, 2014


At this point it's pretty clear that a softening of world growth (notably driven by a slowdown in Emerging Markets, particularly China where PMI's have been coming down precipitously as last night number confirmed) will prompt Central Banks in the developed world to in some cases reverse course, and in others to increase their money printing mode (elegantly denominated QE).

The Fed has already abandoned previous targets of unemployment and now has referred to "qualitative" targets (read: there is no specific formula), and despite their continued tightening will sooner rather than later reverse course due to the contagion effect from lower growth abroad (there is a tendency in the US to forget that their economy is global, particularly their large corporations have a significant source of revenue outside the country). All the GDP growth targets have been off even with massive amounts of printing during the last 5 years (how good an investment is to incur in additional debt of around 7% of GDP per year in order to obtain 2% growth?). Higher interest rates and a stronger dollar constitute a magnificent cocktail that is likely to stall what has already been an anemic growth rate (does it a take a Phd to realize their problem is structural and therefore contingent measures will only postpone a structural change?).

In Europe the economy is growing. But the devil is in the detail: 0.4% growth? After throwing under the rug all their increased debt into their banking system balancesheet. Great formula for success, notice how anti austerity movements are on the rise, people are demanding implicitly higher social spending, and therefore it isn't impossible to assume that in order to ramp their economy to something a bit more decent they will too be forced into money printing. The Euro appreciating shouldn't be a matter to be proud, as their competitiveness is getting clobbered. Their problems are structural too (namely to have a union of very different economies and political systems under one umbrella, their desire to keep the boat afloat will likely have the peripheral countries dragging the economy for a very prolonged period of time, or outright breaking the union)

And Japan, 20 years of stagnation where supposedly Abe will now break by......printing more money. Human nature at it's best, no further comment.

As mentioned in previous articles that I have been writing since 2010, money printing doesn't work, hasn't worked, and will not work. Yes, it will buy time and avoid (maybe) another blow to financial markets. But it won't create real sustainable growth, instead it will leave a massive tab for future (present?) generations.

Quite frankly to assume that the Fed will engage in tightening next year is a very lame joke, with an ever increased fiscal deficit, anemic growth, enormous underemployment rate, asset bubbling driven economy, dysfunctional political class (president included), over indebted middle class, to name a few. Rate hikes will not only kill the recovery, but make sure to tank the economy for a very long period of time.

So let's not get fooled by talking heads words, QE-MANIA is here to stay.

Sunday, March 16, 2014

Why is Copper Falling?

Why is Copper Falling?

It’s the Economy, Stupid.

I wrote an article towards the last quarter of 2011 called “Copper has a Phd. in Economics”, where I stated that one of the best indicators of the global economic cycle is Copper due to the immediate effect on its price when demand in general slows, as it is used intensively in Manufacturing, Industrial activity and Construction, to name a few very important areas of the economy, key to its sustainability.

As it turns out, here we are three years later and the results continue to validate the theory. Lately Copper has been falling more precipitously due to the bad numbers coming out of China, which will likely grow below 7% dragging world consumption and GDP.

I mentioned last week, the growth of the emerging markets economy since 2009 was one of the key pieces of the world moving forward (aside of the absurd amount of debt incurred by the developed world, which eventually will get paid in some shape or form). Domestic credit creation, a boom in industrial production and large amount of reserves kept the emerging economies pulling the train, but they are running of out of steam due to the natural law of diminishing returns.

Let’s take a look at the high correlation between China’s growth and Copper through the two following graphs:

It is possible to see that the fall on Copper prices is not a recent phenomena.

And neither is the decline on growth of the Chinese economy.

The spillover of China’s lower growth will first be felt in Emerging Markets (as it is already the case), although it is inevitable in this globalized world to assume that eventually the Developed World will feel the heat. Not even another round of QEternity in the US, or some form of QE in Europe (let’s calling plainly money printing) or a second (third?) round of Abenomics in Japan will suffice to save the day.

I have already demonstrated in recent comments that the increase in debt and money printing have reached levels of marginal contribution. Let’s just say it: the slowdown is now global. And money printing and credit creation will increase, which in turn will probably save us from falling off the cliff short term and postponing the pain. But debt has by design the ability to destroy those  who never get to amortize it, it’s like a snowball that builds over interest growing exponentially (interest over interest).

Can china make a soft landing? My answer is that it’s very difficult from a physics point of view to make a soft landing on a Jumbo 747 fully loaded. 

Tuesday, March 11, 2014

Chile on 2014

Since some of my friends have been asking me to be more specific on what I think will happen with Chile this year, I will give you my targets for 2014:

1) GDP growing at 2.5 -3.0%
2) Exchange rate 630 -650
3) Interest rates to drop by 1%
4) Inflation running at 3.5 to 4%
5) IPSA touching 3200
6) Copper spot to range between 2.5 to 3
7) Real Estate flat to down 10% on Avg.
8) Increased government spending due to social pressure
9) Decrease on foreign investment

Tuesday, February 25, 2014

Article on Forbes Espanol (Translation to English)

Original Article in Spanish


Since the crisis of 2008-2009, we had an amazing economic recovery since a disaster almost comparable to the Great Depression, with the caveat that measures were taken that temporarily averted the outcome .
The economic and markets recovery has been uneven across regions. Europe has taken much longer to get out of its crisis than the United States and emerging markets had a stellar run, as they had the resources, savings and cheap labor, but above all a guaranteed customer (the developed world) that will buy any consumer goods you sell them.
For 5 years I have tried to explain countless times what, in my opinion, has been the catalyst for this economic miracle: the increase in the debt of developed countries to subsidize and save system, as well as the large amount of money being printed. 
But the economic reaction to these measures has begun to show signs of exhaustion in some markets and the so called available tools were already used, and re-using them would only prolong or even to reverse what should have been the natural trend. Monetary policy and debt has exploded to an unsustainable level and printing has become increasingly expensive by means of keep on turning the same wheel, which keeps getting heavier and therefore slower.
Many times during this period I have maintained that this position will end up being unsustainable, and each year resulted in a denial of my belief. Still however, I maintain it. And the big question is: if this is true or not and if so, when it will. But I'm not smart enough to make that prediction, I'm just convinced that it will happen, how and when we will not know. You may wonder why I have such an obstinate conviction that these measures will end up not working, and I will try to explain it in a very simple way: for if everything could be solved by putting more bills and borrowing from the system indefinitely, the world would have reached (at least an economic point of view and market) the status of eternal perfection, or panacea. I wrote this three years ago in an article that was titled "The Fountain of Youth". Simply put, there are no panaceas. The dynamics of our perfect and imperfect world prevent it. There isn't eternal abundance at least in regards to the material aspect, all resources are limited unfortunately, otherwise economy isn't needed. That social science is based on the study of how to manage scarce resources.
Now, why the year 2014 as a different precisely is that emerging markets are already declining in economic activity as a result of the slowdown in the developed world, coupled with the hike in the U.S. dollar caused by the "tapering" and given the fact that those markets have also had a lot of investment in such magnitude that the pace of it has naturally beginning to decrease, and thus the growth of its GDP is increasing sat a decreasing rate. Their currencies have been generally depreciating, thereby maintaining while greater export competitiveness, also a higher cost of imports and thus a decrease in consumption coupled with inflation. The activity in emerging markets was what drove industrial production worldwide  and also part of consumption via credit domestic credit creation. But that trend is reversing.
2014 will be a different situation and now the world as a whole will eventually enter a phase of slowdown. While this will not necessarily precipitate a financial cataclysm, then at least there will be much more volatility, and the structural bases will come to wobbling and uncertainty. The United States has unfortunately not enough  strength to carry the wagon, let alone Europe and Japan. China alone still growing at attractive rates is unable to absorb the large fall in aggregate demand worldwide.
Twitter: @ ethanmichaly
* The views expressed are those of the authors and are completely independent of the position and the editorial line of Forbes Mexico.