Kunstler: The Midterm Endgame & Democrats’ “Perpetual Hysteria”

Authored by James Howard Kunstler via Kunstler.com,

Back in the last century, when this was a different country, the Democrats were the “smart” party and the Republicans were the “stupid” party.

How did that work?

Well, back then the Democrats represented a broad middle class, with a base of factory workers, many of them unionized, and the party had to be smart, especially in the courts, to overcome the natural advantages of the owner class.

In contrast, the Republicans looked like a claque of country club drunks who staggered home at night to sleep on their moneybags. Bad optics, as we say nowadays.

The Democrats also occupied the moral high ground as the champion of the little guy. If not for the Dems, factory workers would be laboring twelve hours a day and children would still be maimed in the machinery. Once the relationship between business and labor was settled in the 1950s, the party moved on to a new crusade on even loftier moral high ground: civil rights, aiming to correct arrant and long-lived injustices against downtrodden black Americans. That was a natural move, considering America’s self-proclaimed post-war status as the world’s Beacon of Liberty. It had to be done and a political consensus that included Republicans got it done. Consensus was still possible.

The Dems built their fortress on that high ground and fifty years later they find themselves prisoners in it. The factory jobs all vamoosed overseas. The middle class has been pounded into penury and addiction.

The Democratic Party split into a four-headed monster comprised of Wall Street patrons seeking favors, war hawks and their corporate allies looking for new global rumbles, the permanent bureaucracy looking to always expand itself, and the various ethnic and sexual minorities whose needs and grievances are serviced by that bureaucracy. It’s the last group that has become the party’s most public face while the party’s other activities – many of them sinister — remain at least partially concealed.

The Republican Party has, at least, sobered up some after getting blindsided by Trump and Trumpism. Like a drunk out of rehab, it’s attempting to get a life. Two years in, the party marvels at Mr. Trump’s audacity, despite his obvious lack of savoir faire. And despite a longstanding lack of political will to face the country’s problems, the Republicans are being forced to engage on some real issues, such as the need for a coherent and effective immigration policy and the need to redefine formal trade relations. (Other issues like the insane system of medical racketeering and the deadly racket of the college loan industry just skate along on thin ice. And then, of course, there’s the national debt and all its grotesque outgrowths.)

Meanwhile, the Democratic Party has become the party of bad ideas and bad faith, starting with the position that “diversity and inclusion” means shutting down free speech, an unforgivable transgression against common sense and common decency. It’s a party that lies even more systematically than Mr. Trump, and does so knowingly (as when Google execs say they “Do no Evil”). Its dirty secret is that it relishes coercion, it likes pushing people around, telling them what to think and how to act. Its idea of “social justice” is a campus kangaroo court, where due process of law is suspended. And it is deeply corrupt, with good old-fashioned grift, new-fashioned gross political misconduct in federal law enforcement, and utter intellectual depravity in higher education.

I hope that Democrats lose as many congressional and senate seats as possible. I hope that the party is shoved into an existential crisis and is forced to confront its astounding dishonesty. I hope that the process prompts them to purge their leadership across the board. If there is anything to salvage in this organization, I hope it discovers aims and principles that are unrecognizable from its current agenda of perpetual hysteria. But if the party actually blows up and disappears, as the Whigs did a hundred and fifty years ago, I will be content. Out of the terrible turbulence, maybe something better will be born.

Or, there’s the possibility that the dregs of a defeated Democratic Party will just go batshit crazy and use the last of its mojo to incite actual sedition. Of course, there’s also a distinct possibility that the Dems will take over congress, in which case they’ll ramp up an even more horrific three-ring-circus of political hysteria and persecution that will make the Spanish Inquisition look like a backyard barbeque. That will happen as the US enters the most punishing financial train wreck in our history, an interesting recipe for epic political upheaval.

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Is This Gary Johnson’s Last Campaign? New at Reason

With only 12 days remaining until election day, Gary Johnson brought Reason along for an intimate look at his campaign for a U.S. senate seat.

Not only did the former New Mexico governor grant Reason privileged access to his political life, he also showed a surprising willingness to cast aside rehearsed talking points. From the back seat of his SUV, Johnson spontaneously shared many of his private hopes, fears, ambitions, jokes, as well as insights into his personality.

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Sarah Lawrence Professor’s Office Door Vandalized After He Criticized Leftist Bias

SLCAfter penning an op-ed for The New York Times decrying the ideological homogeneity of his campus administration, a conservative-leaning professor at Sarah Lawrence College discovered intimidating messages—including demands that he quit his job—on the door of his office. The perpetrators had torn down the door’s decorations, which had included pictures of the professor’s family.

In the two weeks since the incident, Samuel Abrams, a tenured professor of politics at Sarah Lawrence, has repeatedly asked the college’s president, Cristle Collins Judd, to condemn the perpetrators’ actions and reiterate her support for free speech. But after sending a tepid campus-wide email that mentioned the importance of free expression, but mostly stressed her “commitment to diversity and inclusive excellence,” Judd spoke with Abrams over the phone; according to him, she accused him of “attacking” members of the community.

“She said I had created a hostile work environment,” Abrams said in an interview with Reason. “If [the op-ed] constitutes hate speech, then this is not a world that I want to be a part of.”

What’s more, when the two met in person, Judd implied that Abrams was on the market for a new job, he said.

“I am not on the job market,” he said. “I am tenured, I live in New York. Why would I go on the job market?”

Abrams interpreted Judd’s remarks as a suggestion that he might be better off leaving the school. Judd did not respond to a request for comment.

Abram’s op-ed criticized the “politically lopsided” events hosted by the college’s Office of Student Affairs, including seminars on microaggressions, understanding white privilege, and “staying woke.” It also included original research: a nationally representative survey of 900 administrators. According to this data, liberal administrators outnumber conservatives 12 to 1. This would mean the ranks of the administration are even more uniformly liberal than the faculty.

“While considerable focus has been placed in recent decades on the impact of the ideological bent of college professors, when it comes to collegiate life—living in dorms, participating in extracurricular organizations—the ever growing ranks of administrators have the biggest influence on students and campus life across the country,” wrote Abrams.

Many Sarah Lawrence students and alumni did not appreciate Abrams calling attention to this issue.

“There was an emergency student senate meeting, to my knowledge,” said Abrams. It was his understanding that the meeting produced a declaration calling for him to be stripped of tenure and dismissed from the college. Judd sent a campus-wide email about the meeting, which she described as “not only thoughtful, but thought-provoking.”

“The Senate asked me to publicly affirm that Black Lives Matter, that LBGT+ Lives matter, and that Women’s Justice matters,” wrote Judd in the email. “I emphatically did.”

The student senate did not immediately respond to a request for comment.

Abrams’ office door was vandalized on October 16, hours after the op-ed’s publication. The perpetrators posted a sign on the door that read, “Our right to exist is not ‘ideological,’ asshole,” and was signed “transsexual fag.” Another flyer demanded that he apologize to residence life staff and the director of campus diversity, students of color, queer students, trans students, and other marginalized persons. Multiple messages instructed Abrams to “quit,” and one told him to “go teach somewhere else, maybe Charlottesville.”

Abrams believes the perpetrators tried to break into his office; some of his books had fallen off their shelves as if the sign-posters had slammed the door and the walls.

“I’m really shaken,” he said.

Abrams’ dealings with Judd have further unnerved him. During their conversation, she implied that he should have cleared his public writings with her before submitting them, something he described as unacceptable.

Several of Abrams’ colleagues met with Judd to discuss the vandalism and express their view that such acts could not be tolerated. Judd agreed, but did not pledge to take any further actions. These professors thought she seemed scared that the students might hold more protests, creating a public relations disaster, according to Abrams.

This incident is an example of a concerning phenomenon: college administrators going soft on free speech in an effort to appease a handful of extremely aggressive students. Administrators should take greater care to avoid explicit ideological bias, and they must defend the free speech rights of professors who speak out against it. A college that attempts to muzzle, discourage, or rid itself of speech that offends the far left is failing its mission.

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Feds Crack Down On Traders “Spoofing” To Manipulate Prices Amid Record Number Of Cases

Federal regulators with the Commodity Futures Trading Commission (CFTC) are ramping up efforts to bust traders using a tactic known as “spoofing” to manipulate market prices, reports the Wall Street Journal, citing enforcement officials. 

Earlier this year, the CFTC began receiving daily sets of market data from the world’s largest futures exchange – the CME Group, which handles around 85% of all futures trading by volume. 

Thanks to the data sharing arrangement, regulators have had unprecedented access to daily trading data with a one-day delay, giving them the ability to analyze trading activity for fraud. The result has been a record number of manipulation cases brought against traders. Regulators at the CFTC had previously relied on CME staff and whistleblowers to spot the practice. 

The data-sharing agreement, effective as of February, comes as the CFTC and Justice Department both pursue traders engaged in spoofing, a practice outlawed by the 2010 Dodd-Frank Act. When spoofing, traders place fake orders to create the illusion of supply or demand, causing prices to swing up or down. The traders then profit from the move back as the market reverts to normal levels.

The CFTC brought a record 26 cases related to manipulative conduct and spoofing in the fiscal year ended Sept. 30. Several of those civil cases were accompanied by criminal charges filed by the Justice Department. Between 2009 and 2016, the average number of such cases brought was just five a year. –WSJ

While spoofing is also a big problem in stock and bond markets, futures regulators and exchanges have been particularly concerned after the 2010 stock-market flash crash, which British trader Navinder Sarao caused after using an automated trading program to manipulate the market for S&P 500 futures contracts. Sarao was charged with fraud by US authorities. 

Navinder Sarao

The Journal notes that in one recent case, the DOJ charged three traders with manipulating stock-futures contracts, resulting in over $60 million in losses for the counterparty. 

Regulators and exchanges typically use statistical analysis to determine if a trader’s strategy relies on spoofing. In addition, they examine emails and other communication for signs of intent to spoof. 

CME also has implemented new automated surveillance programs to monitor trader-messaging activity. This can help determine whether traders intended to engage in manipulation. The exchange employs more than 50 investigators who have experience working on antispoofing programs. –WSJ

“Policing the market for disruptive trading practices continues to be a huge part of our regulatory investment and effort,” said CME’s chief regulatory officer, Thomas LaSala. 

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Weekend Reading: October Exposed The Passive Problem

Authored by Lance Roberts via RealInvestmentAdvice.com,

I have written about the “problem with passive” previously which mostly fell on “deaf ears.” Such should not be surprising after one of the longest advances in market history with virtually no volatility in 2017.

However, as they say, “payback is a bitch.”

This year started off with a January rush higher followed immediately by a 2-week sell-off that wiped out the entire advance. But then it was over, and the market began to stair step higher ultimately reaching all-time highs.

Once again, the “buy and hold” and “passive indexing” mantras were seemingly proved right.

And then the month of October arrived and stocks plunged more in one month (-7.4%) as compared to the decline from the closing highs in January to the lows of March (-6.5%).  (As noted, it is important that November musters a fairly strong rally to keep the monthly MACD sell signal from triggering. Such would denote a much more negative backdrop for stocks in the months ahead.)

Over the last couple of months, we have repeatedly warned our readers that a pickup in volatility in October was highly likely due to the strong advances made by the markets during the preceding summer months. At the beginning of September I penned:

“However, there are plenty of warning signs that the “good times” are nearing their end, which will likely surprise most everyone.”

Then I reiterated that point two weeks later. To wit:

“While we are long-biased in our portfolios currently, such doesn’t remain there is no risk to portfolios currently. With ongoing “trade war” rhetoric, political intrigue at the White House, and interest rates pushing back up to 3%, there is much which could spook the markets over the next 45-days.”

The chart below only shows months where the market lost more than 5%. You will notice clusters of losses during the centers of major bear markets such as 1974, 2000, and 2008.

So, with October behind us, the market should march back to all-time highs. Right? Maybe not, as this time is not like last time.

  • The Fed is hiking rates versus either lowering or keeping them at zero.

  • The Fed is reducing rather than increasing their balance sheet.

  • The current Administration is insisting on a “trade war” which slows global growth.

  • The economic cycle is mature rather than recovering.

  • Record levels of debt at risk of rising rates versus a re-leveraging cycle with ultra-low rates.

  • A mature housing, auto, and consumption cycle versus a recovery.

  • Global central bank interventions have begun to taper versus expansion

  • Peak earnings growth versus expansion

  • Peak valuations versus expanding valuations

 

While the sell-off this past month was not particularly unusual, it was the break of material levels of support which was different. Furthermore, the uniformity of the price moves revealed the fallacy “passive investing” as investors headed for the door all at the same time. Such a uniform sell-off is indicative of what we have been warning about for the last several months and should serve as a warning.

“With everyone crowded into the ‘ETF Theater,’ the ‘exit’ problem should be of serious concern. Unfortunately, for most investors, they are likely stuck at the very back of the theater.

However, I am suggesting that remaining fully invested in the financial markets without a thorough understanding of your ‘risk exposure’ will likely not have the desired end result you have been promised.

As I stated often, my job is to participate in the markets while keeping a measured approach to capital preservation. Since it is considered ‘bearish’ to point out the potential ‘risks’ that could lead to rapid capital destruction; then I guess you can call me a ‘bear.’ 

Just make sure you understand I am still in ‘theater,’ I am just moving much closer to the ‘exit.’”

Despite the best of intentions, individual investors are NOT passive even though they are investing in “passive” vehicles. When these market swoons begin, the rush to liquidate entire baskets of stocks accelerate the decline making sell offs much more violent than what we have seen in the past.

This concentration of risk, lack of liquidity, and a market increasingly driven by “robot trading algorithms,”  reversals are no longer a slow and methodical process but rather a stampede with little regard to price, valuation, or fundamental measures as the exit becomes very narrow.

October was just a “sampling” of what will happen to the markets when the next bear market begins.

Oh, I almost forgot, the other problem with the whole “passive investing” mantra is that “getting back to even” is not a successful investment strategy to begin with.

#YouHaveBeenWarned

Just something to think about as you catch up on your weekend reading list.

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“You get recessions, you get stock market declines. If you don’t understand that’s going to happen, then you are not ready and you will not do well in the markets” – Peter Lynch

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Stocks Soar On Biggest Weekly Short-Squeeze Since Election, Bonds Bloodbath

After Schocktober, November’s chaos likely left a lot of traders thinking this…

Chinese stocks saw an orgy of sudden mysterious buying pressure after Monday’s dip… (heaviest volume week since February)

 

European stocks were  higher but considerably less linearly manipulated…Everyday saw a solid open sold off…

 

US Stocks are back in the green for the year thanks to this mega squeeze…

US Markets were utter chaos on the week with plunge protection bids and short-squeezes everywhere… Small Caps and Trannies outperformed…

 

Today was all about Apple and China Trade – An initial tumble after hours (Apple) was quickly erased on Bloomberg headlines about progress in US-China trade talks. This lasted until 3 White House officials (off the record) and Larry Kudlow (on the record) confirmed no such deal progress existed, sending stocks slamming lower. Then in the last hour of the day Trump told reporters progress was being made and stocks recovered…

 

What really helped the week overall was a massive short-squeeze (an 8% surge) – the biggest since Nov 2016 (US Election)…

 

Dow made it back above it 200DMA (but failed with its 100DMA) but S&P, Nasdaq, and Small Caps all remain below the 200DMA still..

 

Obviously Apple was making all the headlines, tumbling back below a trillion dollar market cap…

 

FANG stocks rallied, breaking a four-week losing streak, but it was anything but convincing…

 

Despite VIX compression this week, the term structure remains inverted…this is the 20th day in a row…

 

As stocks tumbled during the day, bonds were also sold as it seems quant derisking remains

 

Treasury yields blew wider all week, accelerating as November started…

 

30Y took out 2018 yield highs – pushing to 3.46% – the highest since July 2014…

 

The Dollar ended the week almost unchanged after yesterday’s tumble and today’s chaotic swings…

 

But the big story was the surge in offshore yuan (and give back today)…

For some context, that 2-day spike erases a month of weakness – but we have seen this kind of manipulated squeeze a few times…

 

Cryptos ended the week practically unchanged (aside from Bitcoin Cash)…

 

Copper ripped on the China headlines, crude dumped as Iran squeeze fears abated…

 

Mirroring the dollar, Gold ended the week almost unchanged in a big V-shaped recovery

 

It seems the new Yuan peg is at 8500 per oz of gold…

 

WTI Crude crashed this week to its lowest in 7 months with a $62 handle…

 

Finally, just in case you thought October was the ‘pause that refreshes’ and encourages investors to buy the dip for another leg higher to infinity and beyond… they are already ‘all in’…

Which is not a good sign as Ned Davis Research just went beariosh on global stocks for the first time since 2009… Investors should sell stocks and buy bonds because the equity decline is only halfway done, according to Tim Hayes, the firm’s chief global investment strategist.

“In making this move on market strength, we are recognizing that the global market downtrend has not led to the levels of panic and capitulation needed to start a bottoming process,” Hayes wrote in a note late Thursday.

“We have yet to see a waterfall decline with extremely high downside volume and volatility.”

Four out of the 10 components in the firm’s model have turned bearish. If another one goes sour, Hayes said he’ll downgrade stock allocation further.

Soft survey data started to catch down to reality this week…

Tighter financial conditions still point to a considerably lower stock market…

No matter what – something changed!!

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Will Cronyism Doom Scott Walker’s Re-election? Here’s What to Watch in Next Week’s Gubernatorial Races.

Two years ago, it was Donald Trump’s victory in Wisconsin—an unexpected result that he seemingly never tires of recapping—that effectively clinched his win over Hillary Clinton.

Next week, another close race in Wisconsin will go a long way towards determining whether Election 2018 is a blue wave or a tsunami.

The Badger State is one of three places—along with neighboring Iowa and Illinois—where incumbent Republican governors appear to be in danger of losing to Democratic challengers. In a year where there are few high-profile gubernatorial bouts, the Midwest offers Democrats the best opportunity to make gains at the state level. It will also provide the first test of whether Trump’s Rust Belt success in 2016 was an outlier result or a sign of things to come for both major parties.

For Wisconsin Gov. Scott Walker, it’s another campaign with national implications. He’s running for a third term in office, but has already won three statewide elections—in 2012, he became the first governor in American history to survive a recall election, spurred by organized labor groups angry about Walker’s public sector union reforms. After an early exit from the 2016 GOP primary, Walker has seen his status as a rising Republican star fade a bit.

Tony Evers, the state superintendent of public education, has promised to spend more money on education and is backed by the same political coalition that has lost to Walker three times before. But this year is different. The most recent Marquette University poll, released on October 31, found the race deadlocked at 47 percent for both candidates—while Libertarian gubernatorial candidate Phil Anderson got 5 percent.

The race is close, in part, because the state’s Democratic base is eager to deliver a blow to Trump, who has a negative approval rating in Wisconsin. But Walker has hurt his own case for reelection with a high-profile giveaway of taxpayer dollars to Taiwanese manufacturing giant Foxconn, which says it will bring 13,000 jobs to a new plant in the Milwaukee suburbs after Walker promised $4.5 billion in state and local tax incentives. The deal also includes the use of eminent domain to remove residents of Mt. Pleasent, Wisconsin, from where the new facility is to be built.

The deal, in short, is exactly the kind of thing that should turn off principled conservatives—and pretty much all taxpayers. A September poll by Marquette University found that only 39 percent of Wisconsinites believed the Foxconn deal was worth it. In a close race, Walker may rue the marginal political costs of the giveaway.

Elsewhere in the Midwest, Iowa Republican Gov. Kim Reynolds is facing a stiff challenge from businessesman Fred Hubbell, a Democrat and political neophyte seeking elected office for the first time. Even moreso than in Wisconsin, this race is being driven by national issues. Trump’s tariffs have angered farmers and helped boost Democrats’ chances—and the backlash against Rep. Steve King’s (R–Iowa) support for European white nationalists could be a factor, too.

The Republican incumbent who most certainly appears doomed is Illinois Gov. Bruce Rauner, who trails Democratic challenger J.B. Pritzker by double-digits in most polls. It’s tempting to look at this as the pendulum swinging back. After all, Illinois is a solidly blue state. But GOP governors who scored equally surprising victories in Maryland and Massachusetts in 2014 are both cruising towards re-election. Illinois is a mess, and even though that’s not Rauner’s fault, voters appear ready to punish him for a protracted budget stalemate in 2014 that didn’t materially improve the state’s fiscal condition.

Rauner had some good ideas (though struggled to communicate them effectively) that could have helped Illinois’ sad state of affairs, but his impending defeat is a reminder of how difficult it can be to steer a state back from the edge—and, relatedly, how important it is for policymakers to avoid following Illinois’ path in the first place. Pritzker wants to hike Illinois’ income tax rates, which is unlikely to solve the state’s spending problems (and likely to drive more people out of the state).

Outside the Midwest, the most watched race is likely to take place in Georgia, where Stacey Abrams could become the first black woman elected governor of any state. Barack Obama and Oprah Winfrey have campaigned for Abrams, who finds herself in a virtual dead heat with Republican Brian Kemp, the current secretary of state. Kemp’s office is responsible for overseeing elections in the state, and his refusal to recuse himself in the event of a recount is a bad look. Libertarian Ted Metz is polling in the low single-digits, but could play a role if the race is particularly tight; under Georgia election rules, a runoff election is required if no candidate gets an outright majority of the vote.

Other close races are expected in typical swing states like Ohio and Florida; traditionally red Kansas; and deep blue Connecticut.

But the results in Georgia and Wisconsin are likely to drive the narrative on Wednesday morning.

In Abrams, Democrats have a potentially history-making candidate in a state that’s crucial to the party’s hopes of cracking the Republican stronghold in the Deep South.

A defeat for Walker, meanwhile, might signal to Republicans that there are consequences for espousing one thing and doing another. The man who is in many ways the face of the GOP’s Tea Party era abandoned those small government principles by embracing massive corporate subsidies and kicking people out of their homes. The actions that have Wisconsin voters so angry right now are a microcosm of the GOP’s corporatist behavior in the age of Trump.

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Oil Prices Plunge As Storm Clouds Gather Over Global Economy

Oil declined more than 3% on Thursday, and extended those losses Friday, with ICE West Texas Intermediate (WTI) Light Sweet Crude Oil Futures probing lows not seen since April, due to weakening global demand at a time when the output from the Organization of the Petroleum Exporting Countries (OPEC), Russia, and the U.S. is rising.

Record crude production from the U.S. and Russia, along with a surge from OPEC, has once more created oversupplied conditions.

Russian, U.S. & Saudi crude oil production (data via Reuters Eikon Graphics) 

Oil prices started declining in early October on fears that global economic momentum was waning as the U.S-China trade war escalates, and a slowdown in emerging market economic data (primarily in Asia) was becoming more evident.

Global Crude Futures (data via Reuters Eikon) 

WTI has plunged 17% since its 76-handle probe in early October. Analysts told Reuters they anticipate more selling in coming sessions, noting that oil did not bounce on Thursday on weakness in the dollar, nor did it positively correlate with the rebound in equity markets.

WTI monthly futures (data via Reuters Eikon) 

Besides global growth momentum waning, another reason for downward pressure in oil could be that Washington just granted several waivers on sanctions on Tehran, allowing countries like South Korea, Japan, and India to continue to import Iranian crude (in other words, more supply).

John Kemp, Reuters Senior Market Analyst of Commodities and Energy, believes oil prices are falling as a broad range of financial and real-economy indicators show the global economy is slowing.

“The depth and duration of the slowdown is impossible to gauge at this point, whether it turns out to be simply a mild and short-lived “soft patch”, a longer but still positive “growth recession” with output falling relative to trend, or an “outright recession” with activity falling in absolute terms.

Recent declines in equity markets and softness in freight indicators may turn out to be a false alarm or a pause within an extended cycle rather than mark a cyclical turning point.

Most commentary about the economic cycle is still influenced by the last deep and wrenching recession which accompanied the global financial crisis in 2008/09.

But severe recessions have not been common since the end of the Second World War and most downturns have proved milder, which therefore seems a more likely prediction for the next cyclical slowdown.

In the United States, post-1945 recessions have tended to be short, lasting less than a year in most instances, and in some cases have seen business activity level off rather than decline,” said Kemp.

Kemp provides historical charts on the business cycle: 

Duration of U.S. business cycle (expansion) since 1858 

Duration of U.S. business cycle (expansion) since 1857

Duration of U.S. business cycle (complete cycle) since 1857

If the economy is at a turning point (or a cyclical peak), the sequence of events to follow by the Trump administration would likely involve some combination of fiscal expansion, monetary easing, and or possible reduction in trade tensions. A further slowdown in global growth could send oil prices much lower, as consumption growth declines while production continues to accelerate.

It seems like today could be one of those rare points in time when macro fundamentals and technicals are possibly lining up to signal that one of the most extended bull markets ever is hitting a brick wall. As of now, watch oil prices as a proxy to global growth.

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Fed’s Balance Sheet Shrinks The Most On Record; QE Unwind Hits $321 Billion

On Monday, when discussing the two key, opposing forces facing stocks this week, we said that while on one hand stock buybacks will make a triumphant return, as companies with $50bn of quarterly buybacks exited their blackout periods, and the total number of permitted stock repurchases jumps to $110bn by the end of next week and to $145bn the following…

… the offset of the favorable flows from corporate buybacks would be the Fed itself, as the largest Fed balance-sheet reduction-to-date ($-33.3B) would take place on Halloween.

And sure enough, one month after the Fed quantitative tightening entered its peak monthly unwind phase, during which the Fed’s balance sheet is scheduled to shrink by “up to” $30 billion in Treasuries and “up to” $20 billion in MBS a month, for a total of “up to” $50 billion a month, on October 31 the balance sheet declined by $33.8 billion  – the biggest weekly total yet – consisting of $23.8 billion in Treasuries, $8 billion in Mortgage Backed Securities, and a modest decline in various other assets.

As a result of Wednesday’s maturities, the Fed’s balance sheet has now shrunk by $321 billion to $4.140 trillion, the lowest since February 12, 2014; since October 2017, when the Fed began its QE unwind, it has now shed $321 billion, or just over 7% from its all time highs.

While MBS totals shifted around over the month, the Treasury decline took place in one day as there were no Treasury securities maturing on Oct. 15, while three security issues matured all in one day on Oct. 31, totaling $23 billion. Those were allowed to “roll off” entirely without replacement. In other words, the Treasury Department paid the Fed $23 billion for them, money which the Fed will promptly “shred”, digitally speaking.

Total October TSY maturities were $7BN below the $30BN cap, and while December sees $59N in Treasuries maturing, the Fed’s maturity cap means that roughly half of this amount will be allowed to rollover, while $29 billion worth of new Treasuries will be repurchased. Then, one month later,

One month later, in December, another $18 billion in Treasuries are scheduled to mature, and so forth as determined by the maturity schedule of the Fed’s current Treasury holdings (shown below) until such time as the Fed finally halts QT and/or launches even more QE.

Finally, for traders hoping to time the unwind of the balance sheet “to the day”, this is problematic as there are discrete steps in the process of actual liquidity extraction: as WS notes, the drains runs from the bond market through Treasury auctions and then the Treasury Department’s cash account to the Fed. Throughout the process, the timing of the drainage gets disbursed – as does the impact on the markets.

This week is a case in point: in a time when the Fed just saw the largest shrinkage of its balance sheet since the start of QT, the market soared higher, which once again begs the question: are stock buybacks a more powerful “flow” factor for risk asset prices than the Fed’s balance sheet unwind, and how much longer will this be the case.

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A Brutal New Poll for Gary Johnson’s Senate Bid Has Him Down to Just 8%

Gary Johnson, sunset. ||| Matt WelchCarroll Strategies released a new poll today in the race for U.S. Senate from New Mexico, and the news is brutal for Libertarian Gary Johnson: just 8.4 percent, compared to 50.7 percent for incumbent Democrat Marin Heinrich and 37.9 percent for Republican Mick Rich. That’s lower than the 9.3 percent Johnson received in New Mexico for president in 2016.

The poll had more respondents (1,202) and thus a lower margin of error (+/- 2.8 percent) than any survey taken of the New Mexico Senate race this year. It also comes days after another unhappy poll for Johnson—16 percent, compared to 48-32 for the frontrunners, from Emerson College, which is the same pollster that had Johnson in second place two months ago.

The candidates’ average in the five independent polls taken since Johnson jumped into the race 10 weeks ago now stands at 46 percent for Heinrich, 27 percent for Rich, and 17 percent for Johnson. FiveThirtyEight currently forecasts the race as 51.1-33.0-15.9, respectively.

Reason on Gary Johnson here.

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