Trust Not In Twigs

In case you haven't been paying attention there a big split going on globally between the elites, the so-called experts, and the rest of us. Brexit is just one branch of that growing tree that's getting bigger by the day. There are plenty more examples. The Trump-Clinton tussle is another, though many will try to deny it.

The meme is a simple one, the rabble should just trust the experts. There are some real problems with that: For one, there are no real experts. Politicians, bureaucrats and economists are all examples of the popular classic case. An expert can be be someone who knows a little more than you, however infinitesimal that little. Another issue is, knows more of what? At some point useful has to enter into the picture. Academics ought to come up here.

Text books are written by those so-called experts. When it comes to cutting interest rates, as noted in the WSJ today, it's suppose to lower currency values. But don't tell that to central bankers in Japan and Australia, to name a couple. There are many more, Russia, Indonesia, South Korea, Taiwan and Hungary.

 Asking why is a fair question, but it's not relevant at this point. As T.S. Eliot said in The Love Song of J. Alfred Prufrock:"Oh do not ask what is it? Let us go and make a visit." The yen is nearly 16% higher after the BOJ implemented negative interest rates earlier this year. Australia cut rates last week, it's second this year, and it's currency rallied promptly to its highest level in three months.

In our Overnight blurb this week we noted New Zealand's currency, the kiwi, suffered a similar fate after bankers there lopped off 25 basis points Thursday, cutting its rate to 2%, a move that sent the kiwi to its highest levels in a month.

And this brings us to theory, a province where most experts dwell. "In theory," as the Journal notes, "loosening monetary policy should lower a currency's value." But if memory serves, we believe it was Popper whose pointed out there are only two kinds of theories, those that have been disproved and those waiting to be disproved.

As we pointed out previously, financialspuds.blogspot.com/2016/08/credibilty-on-line, negative yielding government bonds as a percentage of outstanding government debt are growing, now about one third of all outstanding government bonds, at $8.8 trillion. It used to be a billion here a billion there and pretty soon we're talking serous money. Now it's a trillion here, a trillion there.

So what's the common factor here? The  Journal claims: interest rates "remain positive in most of those countries, despite the rate cuts. That makes their debt more attractive for return-hungry investors faced with a growing pool of negative-yielding government bonds...."

The moral of the story should be clear. To a drowning person even the smallest twig looks attractive.