Month: November 2016

Decade Of Negative Real Interest Rates: Who Benefited?

Submitted by Michael Shedlock via MishTalk.com,

Rudy Havenstein Tweeted an interesting chart earlier today on real negative interest rates.

I recreated the chart below and also share a chart from Doug Short on real median incomes to help put this financial repression by the Fed in proper perspective.

Decade of Negative Real Interest Rates

decade-of-negative-real-interest-rates

The above chart was created by taking the short-term treasury bill rate and subtracting the year-over-year rate of inflation as measured by the CPI.

A massive housing bubble formed in the first period real interest rates were negative. In the current prolonged period of negative rates, bubbles formed in the stock market and bond markets globally.

Outside the US, nearly three quarters of the world’s bond traded at negative interest rates.

Doug Short at Advisor Perspectives updated his series of charts on Median Household Income earlier today.

Median Household Income, Nominal and Real

medium-household-income-2016-11a

Median Household Income Growth

medium-household-income-2016-11b

Doug Short notes: The reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century. Real incomes (the blue line) hit an interim peak at a fractional 0.7% in early 2008, far below the nominal illusionary interim peak (as in money illusion) of 27.2% six months later and the latest at 42%, a record high. The real median household income is now at -0.6% from its turn-of-the-century level. In essence, the real recovery from the trough has been frustratingly slow.”

Who Benefited?

  • Bailed out banks
  • Government bodies via property tax hikes, income tax hikes, sales tax hikes and collection
  • Asset holders – The wealthy

The median guy lost. Those at the bottom end got clobbered much harder. Only the top 10% or so fared well.

The primary beneficiary of QE, negative real rates, and inflation was the top 1%.

The Election

Writers still struggle to explain the election of Trump. The above charts explain clearly.

The median guy on the street is fed up by financial repression. Thanks to mainstream media, the “deplorables” are upset at corporations, at globalization, and at the failure of government to hike minimum wages.

Placing Blame Where It Belongs

Thanks to mainsteam media, which parrots the idea that inflation is good, the “deplorables” fail to blame the institution most responsible: the Fed.

Globalization is a good thing. Falling prices are a good thing.

The average guy on the street understands the latter, but not the former. The average economist, brainwashed by years of Keynesian economic training fails to understand anything.

Academia and mainstream media parrot patently false theories on the benefits of inflation and tariffs. Instead of picketing the Fed, the “deplorables” voted for Trump.

Economist Paul Krugman need only look in a mirror to see one of the reasons the “deplorables” voted the way they day. Krugman still fails to understand what happened.

Shortly after the election, Krugman made a confession: Krugman Admits He Is Clueless. That Progress will be Short-Lived

Explaining Trump

Here is a the key chart from Explaining Social Anger, Brexit, Donald Trump in One Chart.

Shrinking Middle Class

Wealth Gap

The above chart from the Wall Street Journal article IMF’s Grim Long-Term U.S. Outlook in Six Charts.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

For a synopsis, please see Deflation Bonanza! (And the Fool’s Mission to Stop It).

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

The Fed’s fight against deflation is amazingly counterproductive and the above charts provide ample evidence.

Routine Deflation Harmless

Routine CPI deflation is harmless. The Bank of International Settlements (BIS), did a detailed study and agrees. For details, please see Historical Perspective on CPI Deflations: How Damaging are They?

In their attempts to fight routine consumer price deflation, central bankers create extremely destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflation.

The final irony in this sad saga is Paul Krugman, Who Proposed Fight with Fake Outer Space Aliens to Stimulate the Economy, Now Worried About Quality of Trump’s Spending.

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An interesting perspective on the War on Cash

It’s happening faster than we could have ever imagined.

Every time we turn around, it seems, there’s another major assault in the War on Cash.

India is the most notable recent example– the embarrassing debacle a few weeks ago in which the government, overnight, “demonetized” its two largest denominations of cash, leaving an entire nation in chaos.

But there have been so many smaller examples.

In the US city of New Orleans, the local government decided earlier this month to stop accepting cash payments from drivers at the Office of Motor Vehicles.

As I wrote to you recently, several branches of Citibank in Australia have stopped dealing in cash altogether.

And former US Treasury Secretary Larry Summers published an article last week stating that “nothing in the Indian experience gives us pause in recommending that no more large notes be created in the United States, Europe, and around the world.”

In other words, despite the India chaos, Summers thinks we should still curtail the $100 bill.

The conclave of the high priests of monetary policy almost invariably sings the same chorus: only criminals and terrorists use high denominations of cash.

Ken Rogoff, Harvard professor and former official at the International Monetary Fund and Federal Reserve, recently published a book blatantly entitled The Curse of Cash.

Ben Bernanke’s called it a “fascinating and important book”.

And, shockingly, a number of reviews on Amazon.com praise “brilliant” Rogoff’s “visionary concepts” in his “excellent book”.

Rogoff, like most of his colleagues, contends that large bills like the $100 or 500 euro note are only used in “drug trade, extortion, bribes, human trafficking. . .”

In fact they jokingly refer to the 500-euro note as the “Bin Laden” since it’s apparently only used by terrorists.

Give me a break.

My team and I did some of research on this and found some rather interesting data.

It turns out that countries with higher denominations of cash actually have much lower crime rates, including rates of organized crime.

The research was simple; we looked at the World Economic Forum’s competitive rankings that assesses countries’ levels of organized crime, as well as the direct business costs of dealing with crime and violence.

Switzerland, with its 1,000 Swiss franc note (roughly $1,000 USD) has among the lowest levels of organized crime in the world according to the WEF.

Ditto for Singapore, which has a 1,000 Singapore dollar note (about $700 USD).

Japan’s highest denomination of currency is 10,000 yen, worth $88 today. Yet Japan also has extremely low crime rates.

Same for the United Arab Emirates, whose highest denomination is the 1,000 dirham ($272).

If you examine countries with very low denominations of cash, the opposite holds true: crime rates, and in particular organized crime rates, are extremely high.

Consider Venezuela, Nigeria, Brazil, South Africa, etc. Organized crime is prevalent. Yet each of these has a currency whose maximum denomination is less than $30.

The same trend holds true when looking at corruption and tax evasion.

Yesterday we wrote to you about Georgia, a small country on the Black Sea whose flat tax prompted tax compliance (and tax revenue) to soar.

It’s considered one of the most efficient places to do business with very low levels of corruption.

And yet the highest denomination note in Georgia is the 500 lari bill, worth about $200. That’s a lot of money in a country where the average wage is a few hundred dollars per month.

Compare that to Malaysia or Uzbekistan, two countries where corruption abounds.

Malaysia’s top cash note is 50 ringgit, worth about $11. And Uzbekistan’s 5,000 som is worth a paltry $1.57.

Bottom line, the political and financial establishments want you to willingly get on board with the idea of abolishing, or at least reducing, cash.

And they’re pumping out all sorts of propaganda to do it, trying to get people to equate crime and corruption with high denominations of cash.

Simply put, the data doesn’t support their assertion. It’s just another hoax that will give them more power at the expense of your privacy and freedom.

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Oil Mixed After Biggest Cushing Build Since March 2015

Following last night's API reported surge in product and Cushing inventories, DOE confirmed massive builds in Cushing (biggest since March 2015) and Distillates (biggest since Jan 2016). Of course, with all eyes on Vienna the price action is tough to discern. Production rose very modestly.

 

API

  • Crude -717k (+577k exp)
  • Cushing +2.3mm (+26k exp) – biggest since Mar 2015
  • Gasoline +3.36mm (+1.19mm exp) – biggest since Jan 2016
  • Distillates +2.24mm (+1.45mm exp) – biggest since Sept 2016

DOE

  • Crude -884k (+577k exp)
  • Cushing +2.419mm (+26k exp) – biggest since Mar 2015
  • Gasoline +2.097mm (+1.19mm exp)
  • Distillates +4.957mm (+1.45mm exp) – biggest since Jan 2016

While overall crude inventories dropped very modestly for the 2nd week, the huge builds at Cushing (and in Distillates) are a concern…

Stockpiles of crude in Padd 1, the East Coast, fell in a big way, dropping 3.33 million barrels to 14 million, the least in more than a year.

Crude production rose very modestly on the week, continuing to track rig counts with a lag…

 

Price action post-DOE is mixed…

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The MAGA Trend Continues: Trump Convinces Carrier to Remain

Hold your real assets outside of the banking system in one of many private international facilities  –>    http://ift.tt/2cyFwvQ;

 

 

 

 

The MAGA Trend Continues: Trump Convinces Carrier to Remain

Written by Nathan McDonald CLICK HERE FOR ORIGINAL)

 

 

 

 

Already, we have discussed the “Trump effect” that is gripping America. We are seeing people and companies turning theirbacks on globalism in record numbers and beginning to think about America first.

 

 

The time for the West to begin taking care of itself once again is now. The elite who have ruled over us for decades have gutted our jobs, siphoned off our wealth, and at the same time, made us feel guilty for our past successes. This trend is fortunately coming to a stop.

 

 

Already, Donald Trump has made deals to keep a Ford SUV plant in America and Foxconn is strongly considering moving their manufacturing back to the United States. Both of these are huge wins for Americans and have been discussed at length on this blog, but the MAGA trend doesn’t stop there.

 

 

One of the strongest talking points that Trump uttered on his campaign trail was about Carrier, the massive air-conditioner company that decided to move its manufacturing to Mexico, during the election cycle.

 

 

This decision became a focal point of the Trump campaign, where he made very serious threats of imposing tariffs on the company if they decided to gut these coveted American jobs.

 

 

It appears he was serious, serious enough for the company to take notice and reverse this decision, as reported by the New York Times.

 

 

This decision has been confirmed by the heads of Carrier, as well as Donald Trump himself, who both state that after a lengthy discussion, the decision was reached.

 

 


Once again, this victory proves that Donald Trump is a man of action, a businessman who gets results, not a politician that simply jawbones and says what you want to hear, not what you need.

 

 

I predict that we are going to see this trend continue and we are going to see American business moving back to the United States at rates never before seen. This will be a watershed moment in history, as GOOD paying jobs return and help support this desperately failing economy.

 

 

Will this ultimately put off the ultimate collapse of fiat currency? Perhaps not, but it is worth a shot. Only time will tell if we can reclaim our past glory. We can hope, at least for now.

 

 

Please email with any questions about this article or precious metals HERE

 

 

 

 

 

The MAGA Trend Continues: Trump Convinces Carrier to Remain

Written by Nathan McDonald CLICK HERE FOR ORIGINAL)

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Goldman Raises S&P Target To 2,400 On “Trump Hope”

Having warned for nearly all of 2016 that the market is getting ahead of itself on the back of median P/E multiples that are higher than 99% of all historical reading, Goldman chief strategist David Kostin stubbornly kept his year end S&P target at 2,100 on valuation concerns.

Today, however, with oil soaring and the S&P at all time highs, he finally threw in the towel as a result of the Trump victory, and in a report Kostin writes that the Trump “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400.  However, at that point, “less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends.”

Here is the summary from Goldman:

  • US equity investors have focused “more on hope than n fear” since Donald Trump’s election. Ironically, many commentators believe his campaign rhetoric focused “more on fear than hope.” In 2017, we expect the stock market will be animated by competing views of whether economic policies and actions of President Trump and a Republican Congress instill hope or fear.
  • “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400. The inauguration occurs on January 20 and our Washington economist expects much legislation will be proposed during the first 100 days. The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions. Instead of our baseline adjusted EPS growth of 5% to $123, growth could accelerate to 11% and reach $130, which would support a P/E multiple above 18x. Top “Hope” investment recommendations: (1) Cyclicals vs. Defensives; (2) Stocks with high US versus foreign sales exposure; and (3) High tax rate companies.
  • “Fear” is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level. Our economists expect inflation will reach the Fed’s 2% target, labor costs will be accelerating at an even faster pace, and policy rates will be 100 bp higher than today. Rising inflation and bond yields typically lead to a falling P/E multiple. Congressional deficit hawks may constrain Mr. Trump’s tax reform plans and the EPS boost investors expect may not materialize. Potential tariffs and uncertainty around other policy positions may raise the equity risk premium and lead to lower stock valuations in 2H. The median stock trades at the 98th percentile of historical valuation based on an array of metrics. Top “Fear” investment recommendations: (1) Low vs. High labor cost companies; and (2) Strong vs. Weak Balance Sheet stocks.
  • Money flow represents a potential upside to our baseline forecast. Equity mutual fund and ETF inflows may benefit as investors lose money owning bonds. After years of active management underperformance and outflows, higher return dispersion will increase the alpha opportunity for investors skilled enough to capture it. Economic policy uncertainty and the later stages of the economic cycle are typically associated with higher stock return dispersion

And the details which, among other things, include a discussion of Alexis de Tocqueville:

  • 1. Earnings. S&P 500 operating EPS will grow by 10% to $116 in 2017 and adjusted EPS will increase by 5% to $123. Investors are excited about a prospective cut in corporate taxes that could boost adjusted EPS to perhaps $130, representing growth of 11%. However, our economists are skeptical that all the anticipated tax cuts will take place given the federal budget deficit constraints. Some tax reform will take place and upside exists to our baseline EPS forecast but it will be less than many investors now expect.
  • 2. Inflation and interest rates. In terms of inflation, core PCE will reach the Fed’s 2% objective by the end of next year. The Fed will hike interest rates next month and three additional times in 2017. Ten-year US Treasury yields will rise to 2.75%.
  • 3. Valuation. S&P 500 currently trades at 19x our forward top-down operating EPS estimate, 18x our forward top-down adjusted EPS and 17x our upside adjusted EPS scenario. The market trades at 17x forward consensus bottom-up adjusted EPS. US equities are highly valued relative to history on most metrics and versus inflation and interest rates. We forecast static valuation during the next 12 months.
  • 4. Path and target. We expect the S&P 500 index will rise to 2400 (+9%) by the end of 1Q as investors embrace the possibility that lower taxes will lead to positive EPS revisions. But less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends.
  • 5. Buybacks and dividends. Buybacks will rise by 30% as companies repatriate cash held overseas. Dividends will rise by 6% in 2017, above the 4% growth rate currently implied by the dividend swap market.
  • 6. “Hope” vs. “Fear” strategies: “Hope” will dominate during the first part of 2017 as Cyclicals beat Defensives. Firms with high domestic sales will outperform along with companies with high tax rates. “Fear” will dominate later in the year when investors focus on rising inflation and interest rates. Low labor cost and strong balance sheet firms will outperform.

And the charts:

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Drain the Swamp!: New at Reason

On the campaign trail, Donald Trump said he would “drain the swamp” of Washington, D.C. Are you counting on it?

John Stossel writes:

President-elect Trump says he’s uniquely qualified to “drain the swamp” in Washington, D.C. He can do it, he said at one debate, because as a businessman, he understands American cronyism. “With Hillary Clinton, I said, ‘Be at my wedding,’ and she came to my wedding. You know why? She had no choice because I gave.”

He said that’s why he gives money to politicians from both parties. “When they call, I give. And when I need something from them two years later, three years later, I call them. They are there for me!”

That’s crony capitalism. Ideally, laws are applied equally; no one gets a special break because he gives money. But today’s complex government allows the politically connected to corrupt… most everything.

View this article.

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Stocks Stall As Oil Recouples After VIX Chaos Sparks New Record Highs

VIX has been gapping around like a penny stock all morning with multiple slams producing an exuberant equity open (supported by soaring oil prices) but for now selling pressure is back as Oil and Stocks recouple.

Vix tails are back…

 

And that helped jam stocks to fresh record highs at the open…

 

And oil caught up to stocks…

 

All algos all the time.

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Atlanta Fed Slashes Q4 GDP Estimate From 3.6% To 2.4%

When we looked at the latest disappointing spending data this morning, we warned that GDP would likely be weakned, however we had no idea by just how much. The answer was revealed moments ago courtesy of the Atlanta Fed, which moments ago updated its GDPNow model and said that its forecast for real GDP growth in the fourth quarter of 2016 is 2.4 percent on November 30, down from 3.6 percent on November 23.

From the report:

The forecast of the combined contributions of real net exports and real inventory investment to fourth-quarter growth fell from 0.61 percentage points to 0.18 percentage points after last Friday’s advance economic indicators report from the U.S. Census Bureau. The forecast of fourth-quarter real consumer spending growth fell from 3.0 percent to 2.2 percent after this morning’s personal income and outlays release from the U.S. Bureau of Economic Analysis.

And now, the sellside revisions will follow.

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Pending Home Sales Stall Even Before Mortgage Rates Spiked

Pending Home Sales rose just 0.2% YoY in October, among the weakest of the year.

 

This is made more troublesome since these sales occurred before the election, before the mortgage rate exploded higher and before mortgage applications collapsed…

 

We are sure Yellen has this all “contained.”

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Record Temperatures and Record Grain Yields

WheatSofiaworldDreamstimeThose of us who try to monitor the torrent of climate change studies frequently come across various projections that just seem like a total waste of their researchers’ time. The impacts of future climate change on crop productivity nearly a century hence is one such area. This particular blog post is provoked by a new study in Nature Climate Change purporting to predict that wheat yields will fall by 4.1 to 6.4 percent for every 1℃ increase in global average temperature. Some of the same researchers estimated in a 2014 study in the same journal that global wheat production will fall by 6 percent for each degree Celsius of further temperature increase. Other researchers projected that higher temperatures will also significantly lower corn yields in France, the U.S., Brazil, and Tanzania by “4.5, 6.0, 7.8 and 7.1% per °C at the four sites, respectively.” While these projections claim to take into account efforts to adapt, the researchers all seem to be technological pessimists who more or less assume that farmers and crop breeders will be stuck using techniques and crop varieties not much different from the ones they have now.

Actually, crop breeders in the United Kingdom are already working to create a “super wheat” genetically modified with enhanced photosynthesis. In greenhouses, this boosts yields by 15 to 20 percent and the researchers are planning on field trials next year. In addition, the GMO wheat is even more productive when carbon dioxide levels are higher. In South Australia, researchers are figuring out how to add beneficial microbes (endophytes) that boost wheat yields by 10 percent. American researchers detail in a November 16 article in Science how they are working on another technique to boost photosynthesis that could increase yields by 15 to 20 percent.

According to the Intergovernmental Panel on Climate Change the world has warmed at a rate of 0.12 degrees Celsius since 1951 which implies that global average temperature has increased by nearly 0.8 degrees Celsius. Even as the world warmed, the World Bank reports that per hectare yields of coarse grains (including wheat and corn) have increased from an average of 1,400 kilograms per hectare in 1961 to 3,900 kilograms per hectare in 2014, an increase of 280 percent.

It bears noting that world grain production (including wheat) reached a record high this year, which has been declared by the World Meteorological Organization to be the warmest year ever in the instrumental temperature record.

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