Month: November 2020

For weeks now, we’ve been been pointing to expectations that a Joe Biden victory, accompanied by a Democratic sweep of the Senate, could accelerate a “reflation” trade, as the world witnesses the shift toward fiscal policy in the form of massive fiscal stimulus supplant QE as the preferred vehicle for the central bank carrying out its monetary policy objectives.

This fusion between fiscal and monetary policy is an inevitable consequence of the Fed’s shouldering the burden of promoting economic “equality”, or at least combating “inequality” – a laughably ironic objective for the Fed, which has done more than any other single entity in blowing the equity asset bubble that’s driven economic inequality in the US back to levels last seen during the Gilded Age.

Well, after having MMT pioneer Stephanie Kelton, best known as the go-to economic policy advisor for AOC and Bernie Sanders, on the show, MacroVoices this week followed up with an individual who has examined the potential blowback caused by this historic policy shift.

This week, MV host Erik Townsend interviewed Tian Yang, the head of macro at Variant Perception, an established research shop that frequently produces opinion columns in the financial press. During this week’s interview, Yang outlines the findings from a slide deck that was provided free by MacroVoices to all members (membership is free)

After the historic drubbing endured by crude in the US earlier this year, Yang is among a group of strategists who have been warning about the reflationary blowback that the Fed is risking now that it has explicitly decided to allow inflation to run hot.

Yang outlines some of these concepts in the interview, which we have excerpted below:

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Erik: And where do you see the inflation story coming into this?

Central Banks Must ‘Play Their Part’

Tian: So I think we need to think about inflation both from a structural point of view and a cyclical point of view. So the thing to say is cyclically, when unemployment rates are still quite high, when there’s still capacity in the economy, you don’t expect to see kind of immediate pickup in core inflation. Headline could tick up a little bit when commodity prices industrial commodity, so forth, initiate pickup, so on the cyclical front, there’s not necessarily as much inflation pressure right now.

But structurally, we’ve seen some truly seismic shifts in the kind of policy landscape and the structure of the economy actually just this year. When you see governments and developed market governments around the world start to run giant fiscal deficits funded by central banks, that’s obviously a very dramatic shift away from independent central banking and the focus on inflation.

This is very much going back to the old Keynesian kind of playbook of essentially, fiscal led growth and at the same time, we’ve seen the US Federal Reserve do a number of quite dramatic shifts this year. Firstly, moving to average inflation targeting is obviously quite a big mission that they don’t really know where the NAIRU (Non-accelerating inflation rate of unemployment) is, they don’t really care what the NAIRU is, they are just going to run the economy and let it run hot.

And such a policy is also pretty timing consistent because it’s not well defined, what’s the period over which we’re targeting average inflation. The incentive will always be as inflation picks up for policymakers to just run their heart because it’s easier to kind of keep the party going.

So, both fiscal and monetary policy are starting to become a lot more expansionary and loose. And the historical precedents for this kind of price action would probably go back to World War 2 with a fair-trade record, that essentially meant fiscal deficits would be very large. But there was a moral imperative for the central banks to finance the government deficits, and that ended up creating a lot of inflation.

And this time around, the moral imperative is that the central bank’s got to play their part with the pandemic. And going into the future, the central bank probably has to play their part was addressing inequality, climate change, or any of these big issues that essentially justifies why central banks should finance government deficits.

So that’s quite dramatic policy shift, the other thing that’s happened is that the Fed is now proactively kind of destroying the quality of its balance sheet. So again, as extreme, we could go back to when we were on the gold standard, if you look at central bank balance sheet, most currencies backed by gold, right.

So $1 is an asset for us but for the central bank $1 is a liability so previously they backed it on the asset side of their balance sheet with gold. Obviously, over time we abandoned the gold standard, so forth, the quality of assets on the central bank’s balance sheet is getting worse and worse. And obviously, this year, the fact that they started buying corporate bonds, the fact that, they’re willing to take on fallen angels, hide your debt and take on more credit risk is just another reflection of just the weakening central bank balance sheets.

It’s not necessarily a immediate concern, but it lays the foundations for people to kind of increase inflation expectations and to really worry about what the value of the dollar is. And so when you have these kind of structural shifts in policy coming together in a couple ways to make a kind of deterioration in central bank balance sheets and government balance sheets. That’s typically been the recipe for inflation expectations to become unhinged.

From A Lake To An Ocean

Erik: Tian, I love the picture on page five where you’re talking about lake and ocean regimes of inflation. Needless to say, you’re not talking about a necessarily a really calm easy day out on the ocean, but maybe a stormy day.

Now I want to go back to what you said because it seems to me that the game is very different this time around in that you drew an analogy to, okay, after World War 2 we move to a whole lot of deficit spending, which should be inflationary. The thing is, after World War 2 we were still, as you said, on a gold standard. And the big inflation didn’t really get unleashed until we came after the gold standard with the breakdown of Bretton Woods in 1971.

Now, this time around, we’re going to have I think the same if not a greater shift to a public policy emphasis on major spending programs with a lot of deficit spending. But we’re already in a pure fiat environment, so nobody’s pretending there’s a constraint on how much money you can print in order to finance government spending.

I would think that means that the inflation is certainly not delayed by 20 years the way it was after World War 2, but is it immediate? Or is there still a lag of several years before that inflation really hits the system in terms of consumer price inflation after those pre generated factors like deficit spending kick in? How long does it take before we really see the inflation start to get away?

Tian: Yeah, I mean, that’s a great question. I guess it’s a little bit like when they think about how people go bankrupt, right, it happens very slowly and or all at once. I think this is kind of the analogy we’re kind of drawing here because we’re talking about a shift in inflation expectations, which is obviously predicated on just the general belief in the system.

These things are obviously inherently fairly hard to predict but what we can do is kind of position for when it already makes sense. So when markets are already not pricing in much inflation risk premiums and also as the economy cyclically picks up, those things are going to help just drive a more normal reflation cycle.

So right now, if you position for that, then when the tail comes through and potentially more inflation picks up later, you’re kind of on the right side of it. In terms of the mechanism it could, as you say, potentially happen quickly or you could take a few years. I mean, if we’re in this kind of 1960 style environment then what you need to do is go along for the excess capacity in the economy to be used up first, and then have inflation pick up.

And then you will need that to feed into shifting hecs inflation expectations higher, and then you should move into more of a wage price spiral. Then when people think inflation is going higher, they’re going to demand higher wages and that’s what really kicks off the more uncontrolled inflation right now.

Arguably right now for a lot of people, you know say live in the United States, the actual cost of living inflation is actually already been a lot higher than what CPI would be saying if you look at shadow stats, inflation and these kind of different projections. They would say inflation has be running a 4-5% annually for the past 20 years, if you get rid of a lot of the hedonic adjustments and so forth. And arguably, it’s actually this mismatch between what official CPI says and what people feel is their true cost of living. That gap is also fueling a lot of the populism and the kind of general discontent that we have been seeing in society and, by the way, this isn’t a new, it’s just quite rare that we see it in developed markets.

If you take emerging market economies like Argentina or these places that have been known to have huge inflation’s, this is typically what happens. The population doesn’t believe in the CPI, they think their real cost of living is going up a lot higher, so when it comes to wage negotiations, they demand CPI plus 5-10%.

No more ’60/40′?

Erik: Tian, let’s talk about how this translates for portfolios, it sounds like we’re very much in agreement that inflation is coming, but it’s kind of hard to know exactly when and how it shows up. Probably when it does show up, it shows up in a big way, you don’t want to be caught by surprise, but you don’t know that it’s happening right away. So what do you do in terms of your portfolio in order to be ready for that?

Tian: Yeah, well that’s kind of the million-dollar question at the moment isn’t it? So the first thing to know is, I think I mentioned briefly at the start, clearly more traditional portfolio construction, the kind of 60/40 or the heavy allocation to fixed income, it’s naturally kind of getting to the end of the road. I think most people recognize that as yields bump up against the zero bound, the ability for your fixed income portion to really offer a diversified impact or a hedge to equity risk is going to diminish.

So, going forward, what’s very interesting about commodities is that one of the unique properties of commodities is typically when commodity volatility is high commodity prices actually tend to go up a lot. And this is quite different to equities because normally for equities only when equities are crashing that volatility picks up, whereas for commodities, the volatility tends to be to the upside. Now, the thing to say about commodities is that one of the big reasons why it tends to be very high volatility is that there tends to be quite prolonged periods of demand and supply mismatches for the industry. Just because typically supply responses can take a long time if you’re going to build a new mine, or drill a new well, or build a new plant, it could sometimes you could take up to three to five years. Obviously, if it’s like the super-efficient shell well, maybe it takes one year to get to get it going.

But for a lot of commodity sites if you’re going to build a refinery or build a chemical plant or things like that, it’s going to be three to five years. And because of that very delay supply response it is where you end up with this prolonged period of demand supply mismatches. And so that that’s kind of what we’re starting to see right now, where for a lot of commodity sectors are more capital scarce.

This being a prolonged period of a lack of investment, a lack of capex, and so these are sectors that we would expect to have quite explosive upside as the as the economy recovers and as demand comes back. So I think in the slide deck there’s a section on page 15 where I mentioned the capital cycle. So, I think this is a very interesting framework to actually think about when we’re trying to decide where to invest in.

So for the capital cycle I think that the best thing that I’ve read that’s really inspired us on this was some pieces written by Marathon Asset Management. And it was basically collated together in a book called “Capital Returns: Investing Through the Capital Cycle”, and the book was put together by Edward Chancellor. And so the basic idea is that, if there’s a lot of money flowing to a particular industry or sector, then that inflow of money will cause a lot more competition within that industry which drives down returns and then as returns fall very low then nobody in the industry can make a profit.

Listen to the rest of the interview below:

Submitted by Market Crumbs,

The music industry has been one of the hardest hit since the outbreak of Covid-19 earlier this year.

A survey of 2,000 independent concert venue owners across all 50 states in the U.S. conducted by the National Independent Venue Association found that 90% expect to close for good within a few months if federal funding isn’t provided.

“Independent venues were the first to close​ and will be the last to reopen​,” the NIVA said. “Venues have zero revenue, but obligations like mortgage/rent, bills, loans, taxes, and insurance continue. We have no work to offer our employees for the foreseeable future. The shutdown is indefinite and likely to extend into 2021 as our venues are in the last stage of reopening.”

With federal funding looking all but certain to not come in time to save these venues, Marc Geiger sees an opportunity to pitch his solution. Geiger, who formerly served as global head of the William Morris Endeavor Music Division from 2003 until 2020 and co-founded the music festival Lollapalooza, has formed what he calls SaveLive to essentially bail out struggling music venues.

SaveLive, which Geiger founded with former WME colleague John Fogelman, has landed $75 million in an initial investment round to invest in venues across the country by acquiring at least a 51% stake in each. SaveLive’s plan is to invest in dozens of clubs across the U.S. to create a network of venues that will be prepared for live entertainment to hopefully return in 2022 by their estimates.

“One of my favorite things in the world is to go to a club, be treated well and see an incredible band,” Geiger said. “So I thought, ‘OK, I’m going to raise a bunch of money and I’m going to backstop all these clubs. I’m going to be a bailout solution for them, and I’m going to call the company SaveLive.”

Despite having barely any other options, not everyone in the music industry is keen to SaveLive’s move to bailout struggling venues.

“Geiger’s solution on some level scares me,” Frank Riley of High Road Touring told the New York Times. “He is going to buy distressed properties for money on the dollar and end up owning 51 percent of their business. Is that independent? I don’t know. But it does save the platforms on which things grow and where artists are sustained.”

Geiger told the New York Times that SaveLive isn’t looking to flip venues but rather be a long term partner. SaveLive’s primary backer, Jordan Moelis of Deep Field Asset Management, echoed Geiger’s sentiment, saying “We don’t see this as a distressed-asset play. We see this as a business-building play, a play to be a long-term partner and to be around for a long time.”

With few other options available to struggling music venues across the U.S., SaveLive may be the best hope to save them from closing for good even if some in the industry aren’t completely on board.

Over the past decade we have closely watched the unprecedented divergence between growth and value stocks, which has made 13-year-old momentum-chasing Robinhooders millionaires, while bankrupting countless seasoned value investing titans.

However, as our friends at Kailash Concepts show, there is another historic divergence worth noting. The chart below shows the following:

• Light Blue Line: The Price to Sales ratio of the firms in the S&P500 with the fastest revenue growth
• Dark Blue Line: The Price to Sales ratio of the firms in the S&P500 with the slowest revenue growth

The fastest growers have almost never been more expensive and conversely the slowest growers have almost never been cheaper. Most importantly, the spread between the two has almost never been wider.

Those curious for more may find value, no pun intended, in Kailash’s May 2016 white paper, “The Revenue Wreck – Are We Paying Rational Prices for an Ex-Growth America?”

Authored by John E. McNellis, Principal at McNellis Partners, via WOLF STREET,

Landlords already know this: People are getting more toasted than Wonder Bread…

Happy Hour starts at 3 o’clock. Tenants selling reality-relief are killing it. I called a number of retailers to double-check my desultory anecdotal evidence. One, the owner of a first-rate supermarket chain, said his alcohol sales are up 25 percent since March. That came as no surprise, but the identity of his best-selling beer — Corona — did.

Along with half of America, I assumed that Corona was destined to become the Adolph of beer labels. Wrong. Drinkers love it — some think calling a hangover a “corona virus” is funny. This merchant said the only limitation on his Corona sales was lack of inventory. Neither he nor any other seller of liquor is asking for any rent breaks.

I called a major beer distributor in the Central Valley. Same story. Up 25 percent across the board. Any brand outselling the pack? “Honey, anything selling in a can or a bottle, our customers are buying it.”

Alcohol is easy to vet, sales are reported — no one’s cooking moonshine in their backyards. Marijuana? Let’s just say the numbers are a little cloudy. Without getting lost in the weeds, the big picture looks like this: Recreational marijuana (“rec”) consumption is up considerably this year, but precise numbers are hard to come by. Point of sale numbers for California’s legal rec were up 29 percent for the month of August.

These reported sales exclude of course the everyday low-cost alternatives of illegal and homegrown dope. How big is the illegal business? No one really knows, but a couple weeks ago California’s Attorney General Xavier Becerra touted the eradication of more than a million plants at 455 grow sites by the Department of Justice’s Campaign Against Marijuana Planting (CAMP) program. Unless CAMP is considerably more effective than most governmental programs, his numbers mean there’s enough illegal pot growing in the Golden State’s hills to blanket a lesser state. Or two.

As for the do-it-yourself crowd, you can grow a single plant on your kitchen window sill and, according to the net, harvest a couple hundred joints, enough to light up your neighborhood like a diesel generator. Grow the six plants you’re permitted under California law and you can buy yourself a tractor. No one has a clue how many pot transactions are free or bartered; maybe Netflix could make an educated guess by counting the number of times “Harold and Kumar go to White Castle” has been downloaded.

On the other hand, medical marijuana — the pain-killing lotions and potions — does lend itself to accurate accounting. It’s highly regulated, legal in 33 states and no one is selling it off the back of a truck. I asked the president of a leading medical marijuana company how the virus affected his business. Surprisingly, he said his sales were off 50 percent in early spring, during the depths of the shut-down, but slowly rebounded over the summer and are now surpassing their pre-Covid levels. He needed rent breaks in the spring.

I had assumed just the opposite: that with everyone in all kinds of pain, his sales would have soared. He replied, “Tinctures and topicals are expensive. When the shutdown hit and people were suddenly unemployed, there was a flight from med to rec, to quantity over quality.”

I think he meant that you can deal with back pain a couple different ways: rub an expensive lotion on your lumbar region or roll up a fattie. In addition to being cheaper, the latter approach has the benefit of making television comedy actually seem funny.

Reflecting on the Cannabiz in general, he said the price of “top flower” (on the street, buds) has risen from $1200 a pound wholesale in January to $1500 today, a result of its increased demand. He said the industry benefited by being earmarked essential from the get-go. (Guns and ammunition were also classified essential from day one; let’s hope the overlap between the two consumer groups is small.)

More than its essential classification, he believed the business was aided by the $600 federal stimulus payments to the unemployed. That figures. And, reflecting trends in the larger economy, he thought one clear Cannabiz winner is its home delivery sub-industry; it’s been growing exponentially at the expense of the bricks-and-mortar dispensaries.

As with alcohol, the real estate industry need not worry about its marijuana tenants. Let’s face it, selling highly addictive products has a distinct upside (just ask Starbucks).

The great toilet paper run may have made all the headlines, but it had nothing on pot. When the dopers belatedly realized their dispensaries were about to shut down in mid-March (“Whoa, dude, for sure? No? Whoa. That’s heavy”), they stormed the Bastille, their lines wrapping around the pot shops for blocks, buying everything green except the AstroTurf. A reasonable response to this the worst year anyone can recall.

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Hunter Biden’s abandoned laptop contained a ‘treasure trove of top-secret material, including his father’s private emails and mobile phone numbers,’ and was protected by the password “Hunter02”, according to the Daily Mail.

The younger Biden’s MacBook Pro was full of ‘classic blackmail material’ between compromising sexual material and the private information of not only the Bidens, but also Bill and Hillary Clinton.

Hunter’s passport, driver’s license, social security and credit card numbers were also on the laptop, which revealed that he spent $21,000 on a ‘live cam’ porn website (while claiming he was too broke to pay his stripper baby-mama child support?).

Via the Mail:

The material, none of which was encrypted or protected by anything as basic as two-factor authentication, includes:

• Joe Biden’s personal mobile number and three private email addresses as well as the names of his Secret Service agents;
• Mobile numbers for former President Bill Clinton, his wife Hillary and almost every member of former President Barack Obama’s cabinet; 
• A contact database of 1,500 people including actress Gwyneth Paltrow, Coldplay singer Chris Martin, former Presidential candidate John Kerry and ex-FBI boss Louis Freeh; 
• Personal documents including Hunter’s passport, driver’s licence, social security card, credit cards and bank statements; 
• Details of Hunter’s drug and sex problems, including $21,000 spent on one ‘live cam’ porn website and ‘selfies’ of him engaging in sex acts and smoking crack cocaine; 

The article does not that while Hunter may have used his family name to boost deals with Chinese and Ukrainian firms, there is nothing implicating Joe Biden in any wrongdoing (just a massive like that he ‘never spoke with Hunter’ about his business dealings).

“‘It’s a data breach and dangerous to have this type of material floating around,” one former police commander told the Mail. “For someone prominent, there is not only a risk of great reputational damage but also a risk of blackmail should the material fall into the wrong hands.”

Hunter’s laptop was filled with 11 gigabytes of material covering the period from when his father was Vice President, to when Hunter dropped it off at a Mac Store in Wilmington, Delaware.

Read the rest of the report here.

PeakProsperity’s Adam Taggart writes that a legendary investor foresees hard times ahead…

Jim Rogers is not only one of the most successful investors of our era, he’s also an avid scholar of history.

Seeing that the world is buried under an unprecedented mountain of debt that is requiring more and more central planner intervention to keep from imploding on itself, Jim says history is clear on what happens next.

A clearing of the debt either via massive default, or destruction of the currency it’s denominated in.

He looks into the future and sees a terrible reckoning ahead; one he predicts will be “the worst economic crisis of my lifetime” — and Jim is 78 years old.

So where should investors look to preserve the purchasing power of their wealth against what’s coming?

Jim highly recommends precious metals and other commodities as an important part of the solution. As an overall index, commodities are the cheapest they’ve ever been vs the general stock market in over half a century:

Like many of the previous guest experts on our program, Jim maintains the near-term environment will be one of the most challenging times to invest in our lives.

“I caution all of you, it’s been 11 years since we’ve had a serious bear market… and I would suggest to you that maybe next time when we have a serious bear market it’s going to be the worst in my lifetime,” Rogers told an international forum hosted by Russia.

Additionally, as RT reports, while the coronavirus outbreak triggered the deepest crisis in decades, “overreacting” politicians have only exacerbated the situation, Rogers said.

“This is probably the worst [crisis] that I have seen in my lifetime, because everything collapsed and you had politicians and media and everybody overreacting in my view, and everybody closed down,” he told the 12th annual ‘Russia Calling’ Investment Forum in Moscow, when asked if he sees any parallels with previous financial crises.

“We’ve had many epidemics in history, but never before did they close McDonalds, never before did they close all the airlines,” Rogers noted, adding that this overreaction has ruined many economies and the lives of many people.

Which is why now, more than ever, is the time to partner with a financial advisor who understands the risks in play, can craft an appropriate portfolio strategy for you given your needs, and apply sound risk management protection where appropriate:

Anyone interested in scheduling a free consultation and portfolio review with Mike Preston and John Llodra and their team at New Harbor Financial can do so by clicking here.

Social unrest erupted across Spanish cities for the second consecutive night on Saturday after the government’s decision to extend a six-month state of emergency in response to the second wave of COVID-19 infections. 

Anti-lockdown protesters flooded the streets of Madrid and Barcelona on Saturday night. At least 32 people were arrested and 12 injured when demonstrations turned violent with police in Madrid. Other protests were seen in Malaga, Vitoria, Valencia, Santander, and Burgos, reported RT News. 

On Saturday evening, Spain’s prime minister, Pedro Sanchez, called for calm as the violent protests intensified. He tweeted: 

“Only from responsibility, unity, and sacrifice will we be able to defeat the pandemic that devastates all countries. Violent and irrational behavior by minority groups is intolerable. It is not the way.” 

The extension of the national state of emergency order comes as coronavirus infection cases, on Saturday alone, topped 26,000, one of the highest totals since the start of the pandemic. 

“Lawlessness” was the best way to describe the chaotic events in Madrid, tweeted Insider Paper. 

BREAKING 🚨 Gran Via, #Madrid – lawlessness as protestors are on street clashing with police after they follow to be #Spain’s lockdown rules.

Protests also happening in different cities of Spain like #Barcelona, #Logrono, #Burgos, #Vitoria, #Santander, #Valencia and #Zaragoza pic.twitter.com/EmWEEsVYuX

— Insider Paper (@TheInsiderPaper) November 1, 2020

RT New said, “protesters clashed with police in the capital city of Madrid, vandalizing ATMs, as well as breaking and burning trash cans in the city center.” 

Meanwhile, in Barcelona, anti-lockdown protesters were upset about the nationwide curfew and how it would continue to crush the economy. 

🇪🇸 LOOK: Hundreds gathered in central Barcelona to protest pandemic-related restrictions.

This follows Spain’s recent declaration of a new nationwide state of emergency for the second time this year pic.twitter.com/IXZBn0v649

— Bloomberg QuickTake (@QuickTake) October 31, 2020

Spain remains one of the hardest-hit countries in Europe by the virus pandemic. Frustrations are increasing among Europeans as virus cases continue to rise, and other countries implement their own lockdowns. 

With Europeans taking draconian action again to limit the spread of the virus, it could only be a matter of time before lockdowns are seen in the US – this would obviously not sit well with Americans.