The Next Economic Trend Has Hit the US: STAGFLATION

While the mainstream media is losing its mind about Trump policies, the US economy just flashed yet another major warning sign of recession.

Scratch that, this was worse than recession; this was a recession with inflation or stagflation.

Yesterday, the Chicago PMI scored a reading of 50.3.

A 50= stagnation or the beginning of a recession.

PMI in of itself is bad news. But the new orders component (the component that shows growth) came in at 49.1.

This is WELL into recession territory.

Now let’s add the worst part… Price Paid (what manufacturers are having to pay for items) SOARED to 61.4.

So you’ve got growth collapsing… and prices soaring.

This. Is. Stagflation.

Those who are ignoring these warning signs are walking into a market bloodbath. Stocks are acting like an economic renaissance has just started… but the REAL data is showing us a recession and even worse, a recession coupled with higher inflation.

Indeed, 2016 GDP growth was the worst since 2011… while inflation expectations have shot higher. Looking at a chart of the two, it’s easy to see which direction each is heading.

The reality is that the Trump administration is inheriting an inflationary recession. The markets have yet to fully discount this fact, which is why stocks are holding up for now.

This will not continue much longer. And anyone who is investing based on expected GDP growth of 5% this year and next is going to get taken to the cleaners.

If you’re looking to profit from the REAL impact Trump’s Presidency will have on the market (and the massive opportunities this situation presents), we’ve put together a Special Investment Report outlining three investment strategies that will produce major returns as a result of Trump’s economic policies.

It’s titled How to Profit From the Trump Trade and we are giving away just 1,000 copies for free.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

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Trump’s Irrational Immigration Crackdown: New at Reason

Give Donald Trump credit where it’s due, writes Jacob Sullum. Trump promised an irrational crackdown on immigrants, and he delivered it the first week of his administration.

Trump began his presidential campaign with a speech in which he described most Mexican immigrants as rapists, drug dealers, and other criminals, adding that “some, I assume, are good people.” During his campaign, he repeatedly said that as president he would deport all 11 million people who live in the United States without the government’s permission. As in the speech that launched his presidential bid, Trump is once again scapegoating people based on their national origin (and, implicitly, their religion), notes Sullum, with his immigration executive order. But given the weakness of the security rationale for the order, it has to be understood in symbolic terms, and the symbolism is not pretty.

View this article.

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White House Blackballs CNN; Refuses To Send Surrogates On “Fake News” Network

Well, it’s official…according to a note from Politico, the White House has confirmed that surrogates of the Trump administration will no longer appear on CNN and will instead go to “places where we think it makes sense to promote our agenda.”  

“We’re sending surrogates to places where we think it makes sense to promote our agenda,” said a White House official, acknowledging that CNN is not such a place, but adding that the ban is not permanent.

 

A CNN reporter, speaking on background, was more blunt: The White House is trying to punish the network and force down its ratings.

 

“They’re trying to cull CNN from the herd,” the reporter said.

Of course, this development should come as little surprise to anyone who has been paying attention given that Trump has constantly blasted CNN as a “Fake News” outlet ever since his heated exchange with Jim Acosta at a press conference on January 11th.

 

In fact, since that fateful January 11th tussle, Trump’s surrogates, including Conway, Spicer, Chief of Staff Reince Priebus and even Vice President Mike Pence, have made the rounds on the major Sunday political talk shows, with the notable exception of CNN’s “State of the Union” hosted by Jake Tapper.  Tapper noted the absence this past weekend:

“We invited the Trump White House to offer us a guest to provide clarity and an explanation of what the president just did, especially given so much confusion, even within its own government by those who are supposed to carry out this order,” Tapper said on Sunday as he introduced a segment about the Executive Order banning visitors from some countries and putting a hold on the United States’ refugee policy. “The Trump White House declined our invitation.”

But while the Trump administration has refused to send surrogates on CNN talk shows, Spicer has confirmed that the “Fake News” outlet won’t be frozen out of press briefings.  Speaking at an event at George Washington University on Monday, Spicer pointed out that he’s answered CNN’s questions in the regular daily briefings but also noted that he’s “not going to sit around and engage with people who have no desire to actually get something right.”

Of course, Trump’s stance toward CNN is not terribly different from how the Obama administration handled Fox News.  That said, somehow we suspect the mainstream media will be slightly more outraged over Trump’s treatment of CNN than they were over Obama’s hostility toward Fox News over the years.

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George Soros Hires A New Chief Investment Officer

Being a Chief Investment Officer at Soros Fund Management, the $25 billion family office run by billionaire George Soros who reportedly lost $1 billion following the Trump election as a result of bearish market bets, is not easy: recall that last August, Ted Burdick, the former CIO of the fund stepped down after just 8 months in the position but remained at the firm. The transition took place at a time when Soros was said to have returned to an active fund management role, putting in place “big, bearish bets.”

Perhaps sensing he needs some new blood at the top, overnight the NYT reported that Dawn Fitzpatrick, a senior executive at the asset-management arm of UBS, has accepted the job of chief investment officer at Soros.

At UBS, Fitzpatrick oversaw more than 300 billion Swiss francs (about $303 billion).

As the NYT adds, her hiring comes after George Soros, the octogenarian founder of the company, began to involve himself in day-to-day trading decisions after having stepped away to pursue his philanthropic endeavors.

During the first half of 2016, for instance, Mr. Soros reportedly called for a series of investment positions, including holdings in gold, that would benefit from economic turmoil. The company also put on trades that benefited from Britain’s vote in June to exit the European Union, even as Mr. Soros himself was openly critical of the decision.

 

Whether Mr. Soros’s active role within Soros Fund Management will continue during Ms. Fitzpatrick’s tenure could not immediately be determined.

Some details on Fitzpatrick’s background: she began her career as a clerk on the American Stock Exchange working for a predecessor to UBS O’Connor in the 1990s. By 2013, she had risen through the ranks to lead UBS O’Connor’s hedge fund business. Last year, she was named the head of a new unit that combined the hedge fund business with other investment platforms. Ulrich Körner, head of UBS asset management, told employees at the time that during Fitzpatrick’s 23 years at O’Connor, she had “established a track record as a highly successful investor across all these asset classes.”

It was not immediately clear if she would deliver some bullish bias to what has otherwise been a quite bearish – and at least over the past year, money-losing – portfolio.

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Trump Could, And Should, Save Vaping Industry From FDA’s Costly Regulations

If President Donald Trump is looking for an easy way to bring American jobs back—without imposing tariffs, building walls, or imposing other big government policies that will cost American consumers more in the long run—and ease regulations on American businesses, he could start by repealing new regulations for electronic cigarettes approved in August by the Food and Drug Administration.

Those regulations for electronic cigarettes adopted by the FDA during the final year of the Obama administration could, if left on the books, effectively wipe out large swaths of the vaping industry. The Smoke-Free Alternatives Trade Association, an e-cigarette industry group, believes as much as 99 percent of all vaping products could be affected.

That costs jobs, of course, but it also curtails the potential health benefits from getting Americans to switch from smoking to vaping.

A new report released this week by the R Street Institute, a Washington, D.C.-based free market think tank, argues that the Trump administration should take immediate steps to overturn the FDA deeming rule and other federal impediments to the growth of vaping.

“Perverse tobacco policy is failing the American public and will soon destroy thousands of small and medium-sized businesses that are part of the solution, not part of the problem,” write Clive Bates, former director of the United Kingdom’s Action on Smoking and Health; Eli Lehrer, president of the R Street Institute; and David Sweanor, a professor at the University of Ottawa’s Center for Health Law, the three authors of the R Street report.

Among the eight recommendations in the report, the most important is probably wiping away the 2016 reinterpretation of a 2009 law giving the FDA authority to regulate electronic cigarettes and e-liquid by the same standards as tobacco products like cigarettes—yes, even though there is no tobacco in e-cigarettes.

As Reason‘s Jacob Sullum has written, this is essentially a slow-motion ban on many vaping products. The FDA’s application process will cost as much as $1 million and a separate application will be required for each and every product. Smaller manufacturers unable to afford the costly application process will likely be driven out of the market, or will be bought up by larger businesses. Any product that has been introduced since 2009 is subject to the new rules and manufacturers have until later this year to either pull their products off shelves, or pay up and get approved.

So far, there have been no signals from the Trump administration on whether it will continue with Obama-era policies on e-cigarettes or move in a new direction. It’s unlikely that there will be any major policy announcements until Trump chooses a new FDA commissioner—something that he’s unlikely to do until after his pick to run the U.S. Department of Health and Human Services, Congressman Tom Price (R-Georgia) is confirmed by the Senate.

Jim O’Neill, a managing director at Mithril Capital, an investment firm co-launched by Peter Thiel, has been rumored to be on Trump’s shortlist to run the FDA.

Vaping businesses are hoping to see quick action from the new administration.

“We believe something needs to be done to protect the thousands of businesses that are a crucial player in the global tobacco harm reduction strategy, and help those who are eager to quit smoking have easy access to vaping products,” said Patricia Kovacevic, general counsel for Nicopure Labs, a Florida-based manufacturer of e-cigarette fluid that has launched a lawsuit challenging the FDA’s deeming rule.

Another major change recommended in the R Street report is allowing vaping products to be advertised as what they are: healthier than traditional cigarettes.

The authors note that vaping isn’t completely safe—few things are—but evidence shows that vaping is safer than combustion-based products like cigarettes and cigars.

Guy Bentley, a research associate for the Reason Foundation (which publishes this blog), writes at the Washington Examiner that more than 480,000 Americans died from smoking-related diseases in 2015. That’s more than alcohol, car, illicit drug, HIV and gun deaths combined. The cause of these deaths is the deadly smoke inhaled into the lungs, not nicotine.

The growth of vaping as a substitute for traditional forms of smoking means “smokers can mimic the experience of smoking and get the nicotine they desire while significantly reducing their risk for deadly disease,” Bentley writes.

The rationale for holding e-cigarettes to the same regulatory standard as traditional, tobacco-containing cigarettes is built on the questionable assumption that Americans who smoke e-cigarettes will end up smoking traditional cigarettes too.

While many e-cigarettes contain nicotine extracted from tobacco, but considering them the equivalent of cigarettes is an affront to common sense and medical science. There’s no combustion, no smoke and no tar in e-cigarettes, along with fewer cancer-causing chemicals. One study from the United Kingdom found that e-cigarettes are 95 percent safer than their combustible cousins. Driving e-cigarettes out of the marketplace, as the FDA’s new rules are almost certain to do, will make it harder for nicotine-addicted smokers to kick the habit by taking up a safer alternatives.

Despite all those arguments, perhaps the best example of the absurdity of the FDA’s decision to classify e-cigarettes as tobacco products is the simple fact that vaping doesn’t involve tobacco. In fact, some e-cigarette makers offer “tobacco free” nicotine that is synthesized in a lab or produced from other types of plants, like tomatoes and green peppers.

If the federal government continues taking a hard-line stance that prohibits vaping, or makes vaping products so expensive or difficult to obtain that they effectively are prohibited, it is only standing in the way of potential health benefits of Americans switching from smoking to vaping.

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A Student Felt ‘Traumatized’ Because His Professors Did Not Silence Everyone He Disagreed With

PennA recent op-ed in the University of Pennsylvania’s student paper, written by an unhappy student of color, paints a frustratingly bleak portrait of the emotional state of the modern campus liberal.

That students, James Fisher, claims that the recent semester was the worst he’s had at college so far, and for one reason: several of his white professors caused him to feel marginalized and traumatized.

Why? It’s not entirely clear. Nor is it obvious what should be done about it, or even what Fisher would like done about it.

“Imagine being a black student on Penn’s campus with even one of these types of professors,” wrote Fisher. “I had three. And each one of those professors either did not care to learn about their white privilege, or lied to me and said that they did.”

What cause does Fisher have to presume his professors were lying about their disinterest in issues of privilege? He does not say.

Perhaps the professors made offensive statements or used racially charged language? Nope.

“They think that by not saying racist comments in class, they are doing good,” wrote Fisher. “Not knowing that that half-hearted attempt further contributes to the oppression that I experience in my predominantly white classrooms.”

It seems like Fisher has constructed a lose-lose scenario for his professors. If they make racist comments, they would no doubt be marginalizing him. But if they refrain from making racist comments, they are also contributing to his oppression.

Fisher went on to accuse one of his professors of “perpetuating these systems of oppression in class.” Why? The professor showed images of plantation slaves, and also permitted other students to “say ignorant comments.”

Fisher evidently told the professor that this wasn’t okay—the professor had an obligation to silence other students in order to protect Fisher from mental anguish. The professor tried to console Fisher, but to no avail. As a result, Fisher stopped going to class.

“I stopped going to his class for a month,” he wrote. “With different emotions going through my head from not only this class but from the Trump election, I did not want to step foot into another white space until I made sure that my mental health was restored.”

Readers might find it incredible that a college student could remain a college student even after he stopped attending class for a month because he was offended by some of his peers. But the professor’s flexibility wasn’t sufficient for Fisher.

“It is not enough that you gave your black students extensions on their papers because Trump got elected,” he wrote.

Nothing is enough, it seems:

It is not enough to be aware of your privilege. It is also not enough to be a nice person. Your niceness does not mean that you are not capable of contributing to racial systems of oppression.

It is not enough that you are sorry for the injustices caused by your people. It is not enough that you read one article on the Black Lives Matter movement because your black friend recommended it to you. It is not enough that you gave your black students extensions on their papers because Trump got elected.

The truth is, you as a single person cannot make up for the horrific things that white people have done to us throughout human history. But that does not mean that you do not have the power to stop yourself from oppressing the students that you teach every day.

You have to be invested in stopping racism and oppression every day, not just on your free time.

I think even a reader whose sole goal was to please Fisher would be frustrated by this column. That’s because the student utterly fails to explain what he wants out of his college experience. What could his professors do to assuage his feelings of trauma? He never says. Being aware of privilege, reading about the Black Lives Matter movement, granting extensions to students of color in the wake of Trump’s election, and being nice are all insufficient tactics, according to Fisher.

I don’t mean to come down too harshly on a single student who’s having a rough time. It could be the case that the university is doing a particularly bad job of providing him with the resources he needs to succeed. But this column doesn’t do an adequate job of making the problem relatable to readers.

The College Fix reached out to Fisher for comment, asking him to elaborate on how he felt. Fisher evidently bristled at the suggestion that the answer wasn’t obvious.

“I get that you’re always searching for us [minority students] to get the answer,” he told The College Fix, “when all you have to really do is just shut up and listen.”

That’s a frustrating non-answer: The College Fix was listening. People like me who read Fisher’s column were listening. But no useful answer came. This of course makes it harder to take complaints bout marginalization and emotional trauma seriously. When students claim victim status, it often comes across like this is the goal in and of itself, rather than the means to some end.

College classes are supposed to consist of dialogue between highly-learned experts—the professors—and curious, bright novices—the students. No one should really be shutting up, least of all the people teaching the classes. While it’s true that professors have a lot to learn from their students, leftist students increasingly seem to hold the attitude that the purpose of higher education is to reinforce the ideas they already have and shut out all contrary voices.

Such an attitude will leave them ill-equipped for the real world, where the trauma of encountering an uncomfortable notion is unavoidable.

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El-Erian Warns “We’ve Entered The ‘Twitchier’ Phase III Of The Trump Rally”

The post-election movements of U.S. stocks have been heavily influenced by policy. First they soared, then they traded in a narrow range. Now, Mohamed El-Erian warns, the markets have entered a period of greater volatility underpinned by a tug of war between the expectation of reflationary policies and the risk of stumbling into stagflation. Where we end up will be predominantly a political call.

Via Bloomberg,

Phase I: Euphoric Markets
The markets’ euphoric phase started in the early morning of Nov. 9, when President-elect Donald Trump delivered his acceptance speech. It lasted until mid-December.

 

Trump’s remarks at the Hilton Hotel were conciliatory in tone and notably pro-growth in content. They calmed markets that had been concerned about some of his campaign rhetoric, especially when it came to the imposition of prohibitive import taxes on China and Mexico, the dismantling of the North American Free Trade Agreement and the cancellation of bilateral trade agreements. Having sold off sharply in the run-up to the acceptance speech, Dow futures erased an 800-point drop and the S&P 500 Index climbed off its limit-down level, starting what turned out to be an impressive market surge that set records for the major indices.

 

This first phase was fueled by expectations that, after years of frustrating gridlock on Capitol Hill, the president and the Republican majorities in both houses of Congress would work constructively to unleash the significant potential of the U.S. economy. Markets internalized expectations for policy-induced improvements in growth and inflation, and their translation into higher corporate revenue and stronger pricing power. It was also hoped that stocks would get a boost from higher repurchase activity thanks to the policies that encouraged companies to repatriate cash held abroad. And all of this also fed a surge in both the dollar and yields on U.S. Treasuries.

 

Phase II: Consolidating Markets
Policy announcements can only take you so far in asset markets, especially when the president-elect hasn't been sworn in. That is why, from mid-December to Trump’s inauguration on Jan. 20, stocks traded in a remarkably narrow range as markets waited for information on the detailed design of policies and their implementation. The dollar gave back some gains and yields retraced part of their pronounced upward movement.

 

Phase III: Twitchier Markets
After the inauguration, markets became more fidgety, with sharper moves up or down depending on the latest policy indicators. On the one hand, for example, the deregulation signal provided by the executive order on pipelines took major averages to new records, including a move above the 20,000 milestone for the Dow. On the other hand, concerns about protectionism, fueled by talk of a 20 percent tariff on Mexico or the travel ban affecting seven countries, drove stocks lower. In both cases, the moves were larger than what had been seen in the second phase.

There is a bigger issue at play here, and its implications go well beyond financial markets. Now that the baseline of low and insufficiently inclusive growth has become less secure due to economic, financial, institutional and political factors (I have discussed this issue in previous articles), the policy-driven economy could be getting nearer to a tipping point: into beneficial reflation or damaging stagflation.

Specifically, the implementation of a well-designed set of policies built around the president’s three headline initiatives — tax reform, deregulation and infrastructure — would unleash reflationary forces that would validate existing asset valuation, and could take them a lot higher if the rest of the world were also to improve its policy mix. If, however, the U.S. stumbled into protectionism and trade wars, the markets would give up more of the recent gains, and possibly even overshoot on the way down.

Where markets go from here is therefore a matter of politics more than anything else, with both U.S. and international dimensions. I leave you to make the call. I will limit myself to a simple observation: Having patiently waited for quite a while, markets are now a lot twitchier and point to a period of greater volatility for traders and investors.

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What You Should Know About Neil Gorsuch, Trump Reelection Groups Raised Millions in December, CNN Editor Sues Over Immigration Order: A.M. Links

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US Added A Blistering 246K Private Sector Jobs In January, Most Since June

Just as the hard indicators in the US economy were starting to roll over, with whisper expectations that the Fed’s 3 projected rate hikes in 2017 would gradually be reduced to 2 (in line with market expectations) moments ago ADP reported a blistering 246K jobs were added in January, far above the 168K expected and certainly well above the Fed’s “guidance” of what would be normal monthly job growth in the 80-120K area. This was the highest monthly jobs addition since June, following a modest downward revision to December jobs from 153K to 151K, and even the construction and manufacturing sectors saw job additions of 25,000 and 15,000, respectively

Most jobs were added by small and medium firms as follows:

  • Small firms (1-49) added 62k jobs in Jan.
  • Medium firms (50-499) added 102k jobs in Jan.
  • Firms with over 500 employees added 83k jobs

And with both the Fed due out later today, and the official payrolls report out on Friday, the potential for an upside surprise to both is suddenly in play, which explains why the dollar has spiked on the news to session highs. That said, beware with outlier prints in this series: ADP is notorious for having a dreadful predictive track record.

 

The breakdown by job category:

“The U.S. labor market is hitting on all cylinders and we saw small and midsized businesses perform exceptionally well,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Further analysis shows that services gains have rebounded from their tepid December pace, adding 201,000 jobs. The goods producers added 46,000 jobs, which is the strongest job growth that sector has seen in the last two years.”

Mark Zandi, chief economist of Moody’s Analytics said, “2017 got off to a strong start in the job market. Job growth is solid across most industries and company sizes. Even the energy sector is adding to payrolls again.

here is the change in Total Nonfarm Private Employment by Company Size

 

And the change in Total Nonfarm Private Employmen

 

Finally, the ADP’s famous “infographic”

<br />
      ADP National Employment Report: Private Sector Employment Increased by 246,000 Jobs in January<br />
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European Bond Bloodbath – Worst January On Record Exposes Political Panic Across EU

With general elections scheduled in France, Germany and the Netherlands this year amid an increase in support for anti-euro rhetoric, European bonds from Germany to Greece saw yields surge in January. In fact, as Bloomberg notes, euro-region bonds handed investors the worst start to a year on record.

Worst. January. Ever. for European bonds…

 

Amid heightened political risk across the currency bloc and speculation the European Central Bank may bring its asset-purchase program to an abrupt halt in 2018, yields on French and Italian bonds climbed this week to their highest level relative to benchmark German debt since 2014. As Bloomberg reports, rising populism in the region’s biggest economies and speculation that the ECB’s stimulus plan may be nearing its endgame have clouded the horizon for bond investors, who have grown used to the central bank insulating euro-area securities from political tension. That’s seen yield spreads expand to levels unseen since quantitative easing began in 2015, and left analysts forecasting more pain if electoral risks materialize, particularly in light of the extreme market reactions seen in the wake of Donald Trump’s victory in the US.

The market’s move suggests Draghi’s insistence last year that policy makers weren’t considering scaling down stimulus and caution in January that underlying inflation showed “no convincing signs” of picking up is falling on deaf ears.

 

“The market is obviously seeing through this,” said Mark Nash, the head of global bonds at Old Mutual Global Investors, which oversees about $37 billion. It’s “seeing that quantitative easing has to come to an end soon.”

 

Peripheral bonds may come under further pressure should “markets continue to worry about the integrity of the euro zone,” London-based Nash said. Italy’s “banking system is obviously still impaired. Also, likely elections and political risks” may hurt the nation’s bonds. Nash said he shifted short positions to Italy and Spain from Germany.

 

The market’s “been raising the potential for a hard stop to quantitative easing at the end of this year if we do continue to get these rises in inflation and growth,” Nash said.

Perhaps even more concerning for the sustainability of the EU experiment is the soaring divergence between the two nations at the core of Europe…

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