Band on the Run/Keeping the Dream Alive

I haven’t combined a double album for some time but the parlous state of the mature economies is now reaching that level where ripeness leads to over-ripeness and ultimately turns to rot.? The album, Band on the Run, was released in 1973 by WINGS and tells a light hearted story about an incarcerated band that breaks out of jail, better known as The Beatles Split.? It also alludes to a comment by George Harrison during a post Beatles business meeting that ‘we are all prisoners in some way’.? This passing comment was not just about the groups split but also about the subsequent problems the band members were to encounter with their record label, the ‘Apple Corp Enterprise’.? The other recording is ‘Keeping the Dream Alive’ released in 1987 by a German band, MUNCHENER FREIHEIT.

Band on the Run has always been one of my favourites albums, released when I was studying Economics & Accounting.? Of more significance and relevance, ‘Band on the Run’ is also a mere letter away from ‘Bank on the Run’ but for Bank read ‘Banks on the Run’ because it is Banks, largely in the developed world, that can be likened to the proverbial ‘Road Runner’.? The Banks are rapidly running out of road and when I reference ‘Banks’ my comments are primarily directed at The Central Banks but the Commercial Banks also have their issues and this is where ‘Keeping the Dream Alive’ kicks in so please read on.

It’s well nigh impossible for the Central Banks to keep their dream alive for much longer.? The Road Runner is, indeed, close to the edge of the cliff if he has not already overshot, and much of the blame, can be laid at the feet of Central Bankers who, post the millennium, appeared to lose any sense of purpose.? They are now, metaphorically speaking, close to Check Point Charlie - better known as ‘The Berlin Wall’ - and simply haven’t got a clue what they should now be doing without giving their game away; and it is a game because the well informed now all know what the Central Bankers would like to do.? The conditions are getting so dire for them and they are fully aware that we know what they would like to do; that is to apply a significant easing of short rates in order to support the printing of more money, preferably in that order, because to print first would not only be seen as a disastrous ‘own goal’ but it would also be inexplicable.? The one thing that can be guaranteed is that, however The Fed delivers its remedial action, it will never accept its past errors of judgment because they will always be brokered as the correct policy at the time. The fact that the US Budget Deficit is now over 8%, and is unprecedented in peacetime does however mean that something has to give and that give will have to be sooner rather than later.

One just needs to take a look at the basics.? Yield curves are inverted which means that short rates are higher than long rates and this has always been a classic indicator of forthcoming recessions.? However, because most of the world - and his wife - are hoping and praying for lower short rates, the earnings yield on equities compared to the yield on bonds has never before been this stretched.? For those who I have lost and/or those interested to learn, the Earnings Yield is a financial ratio that shows the relationship between a company's earnings per share (EPS) and its stock price per share.?It's calculated by dividing the EPS by the share price, and then multiplying by 100.?The formula is E/P, or earnings divided by price.?The earnings yield is the opposite or reciprocal of the price-to-earnings (P/E) ratio.

The state of finances is indeed dire and drawing attention to the earlier BERLIN WALL reference, a well informed financial journalist has recently suggested that we are coming to the day that our ‘Paper Money Utopia’ CRUMBLES.? Reference the downfall of The WEIMAR Republic in my previous article.

Latterly, Central Bankers haven’t been that open and honest with the populous and you probably have to go back to the late seventies for some honesty when Paul Volcker was Chairman of the Federal Reserve.? He made the following comments and I quote

?“It is a sobering fact that central banking has led to more inflation, not less. We did better with the 19th-century gold standard, with passive central banks, with currency boards, or even with ‘free banking’. The power of a central bank, after all, is the power to create money and, ultimately, the power to create is the power to destroy.”

I doubt that the present incumbent at the Fed would be allowed to make such a statement these days because, however you slice and dice Paul Volcker’s comments, they are a fairly striking admission of failure from, arguably, the best Fed Chair the Global Economy has had since Wall Street forced this BEHEMOTH on the free world in 1913.

A Central Bank is indeed an extraordinary institution precisely because it’s a privately-owned, but federally-licensed counterfeiter that a regime can use to seize literally everything in the world by printing money and it is of course why we have Inflation and Recessions. It is also why we also have bailouts and colossal national debts. ?It is indeed why Governments have grown disproportionately to dominate the economy and our lives generally. In contrast, under the Gold Standard, dismantled by President Nixon in 1971 to fund the costs of the Vietnam War, had close to zero cumulative inflation over a period when the federal government was 7 times smaller as a percent of GDP. In 1913, the US had a national debt that was 8% of Gross Domestic Product.? Debt is now 140% and it is rising by almost 8% per year. You cannot be serious to coin a well used phrase from Wimbledon by John McEnroe that all is good.

The facts are that the US Federal Reserve and the Financial Sector embracing Banks and the stock market are desperate to reduce interest rates.? However, controlling the rate of inflation is the key variable.? A recession, implied by a negatively sloping or inverted yield curve will help, but this scenario is hardly something investors would relish.? They just want lower rates to justify the stock market’s overstretched valuation but lower rates in recognition of an anticipated recession are hardly consistent with stronger corporate earnings.? It is also debatable whether inflation is yet low enough to justify the material cuts in short rates needed to remove pressure on the Banking Sectors non-performing loans and to remove the Banking Sectors huge losses on their Treasury Bond holdings that were forced on to them in the COVID crisis as AAA rated low risk assets; but you can bet your bottom dollar that The Fed will produce some carefully crafted words to support a cut.? However this time round it will be very much a game of Call My Bluff as they pick and choose from different classes of inflation.

I will leave the summary to some of the lyrics from ‘Keeping the Dream Alive’.

The hopes we had were much too high; Way out of reach, but we have to try; no need to hide, no need to run; because all the answers come one by one; the game will never be over; because we're keeping the dream alive

However, I suspect that the game is anything but alive and could be over, sooner rather than later.?? The Federal Reserve’s incompetence, and indeed other Central Banks including the Bank of England, which have delivered incompetence on such a grand scale, has now got to levels where the plethora of past errors are now irreversible; so much so that dreams may soon turn into nightmares.

The clock is ticking.