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Authored by John Mauldin via MauldinEconomics.com,

The world is awash in debt.

While some countries are more indebted than others, very few are in good shape.

The entire world is roughly 225% leveraged to its economic output. Emerging markets are a bit less and advanced economies a little more.

But regardless, everyone’s “real” debt is likely much bigger, since the official totals miss a lot of unfunded liabilities and other obligations.

Debt is an asset owned by the lender. It has a price, which—like anything else—can go up or down. The main variable is the lender’s confidence in repayment, which is always uncertain.

But there are degrees of uncertainty. That’s why (perceived) riskier debt has higher interest rates than (perceived) safer debt. The way to win is to have better insight into the borrower’s ability to repay those loans.

If a lender owns debt in which his confidence is low, but you believe has value, you can probably buy it cheaply. If you’re right, you’ll make a profit—possibly a big one.

That is exactly what happens in a recession.

Investment-Grade Zombies

While it’s easy to point fingers at profligate consumers, households largely spent the last decade reducing their debt.

The bigger expansion has been in government and business. Let’s zoom in on corporate debt.

The US investment-grade bond universe is considerably more leveraged than it was ahead of the last recession:

Source: Gluskin Sheff

Compared to earnings, US bond issuers are about 50% more leveraged now than in 2007. In other words, they’ve grown debt faster than profits.

Many borrowed cash not to grow the business, but to buy back shares. It’s been, as my friend David Rosenberg calls it, a giant debt-for-equity swap.

There’s another factor, though. Today’s “investment-grade” universe contains a higher proportion of riskier companies. The lowest investment grade tier, BBB, now constitutes half of all issuers:

Source: Gluskin Sheff

All these are just one downgrade away from being high-yield “junk bonds.”

The best data I can find shows that there are roughly $3 trillion worth of BBB bonds and another roughly $1 trillion worth of lower-rated bonds that would still be called “high-yield.”

If it happens like last time, the ratings agencies will wait until their fate is already sealed before they cut ratings on these zombies. But that’s only part of the problem.

Selling Under Pressure

I expect liquidity in these below-investment-grade bonds to disappear quickly in the next financial crisis.

We got a small hint of how this will look in the December 2015 meltdown of Third Avenue Focused Credit Fund (TFCVX), which had to suspend redemptions and then spend two years liquidating its assets.

The fund managers made the right call to liquidate their holdings slowly, getting the best values they could. But that won’t work if the entire fund industry is strained at the same time.

This is a structural problem with mutual funds and ETFs. They must redeem their shares on demand, usually in cash (though some reserve the right to do it in-kind).

If enough shareholders want out at the same time, this can force them to sell fund assets on short notice.

Falling Apart Quickly

When the recession hits, we will see junk bonds—and the riskier end of corporate debt generally—go into surplus.

There will be more available for sale than investors want to buy. The solution will be prices dropping to a point that attracts buyers. I don’t know where that point is, but it’s a lot lower than now.

But there’s a problem. We talked about that $3 trillion worth of BBB bonds. Any that are downgraded by merely one grade will no longer qualify as “investment grade.”

That means that many pension funds, insurance funds, and other regulated entities by law won’t be able to hold them. They have a very short time to sell them back into the market.

Let’s say company X issues $100 million of a bond rated BBB by Moody’s or Standard & Poor’s. There is a high likelihood that some will be in regulated pension or insurance funds, and there will be forced selling at lower prices.

This will set a new price for that bond issue. Every mutual fund and ETF that holds those bonds will have to use the lower price when they mark-to-market at the end of the day.

I have seen this happen three times in my career. Yields go from fairly low to 20% or more at what seems like warp speed. If you are in one of those funds, you’re going to see your value drop precipitously.

Unless you are a professional and/or have some systematic trading signal that tells you when to trade, it’s probably best to avoid anything that looks like a high-yield mutual fund or ETF.

More money is going to be lost by more people reaching for yield in this next high-yield debacle than all the theft and fraud combined in the last 50 years.

A Once-in-a-Lifetime Opportunity

I can understand the plight of retirees who are struggling to live on today’s meager yields. Those high-yield funds have been so good for so long, it’s easy to forget how disastrous a bear market can be. But it gets worse.

 

Quick personal story, and I have to be vague about names here.

Some bond issues have been bought in their entirety by a small handful of high-yield bond funds. The problem is that the company that issued these bonds has defaulted on them. Not just missed a payment or two, but full default.

Their true value, if the funds tried to sell them, might be 25–30% of face if they actually traded, according to the people who told me this. But the funds still value them at the purchase price of $0.95 on the dollar.

How is it they’re still valued much higher? Because the funds haven’t tried to sell them. No transactions mean they can still be “priced” at the last trade, and since there have been no subsequent trades, there is no “mark-to-market” price.

If any of those few funds sold any of these bonds, it would set a “market price” and all would have to mark down the entire holding. So naturally, they aren’t even trying to avoid taking the hit to their NAV.

So here’s my question: How many other junk bond issues are in similar positions?

Note this isn’t just high-yield funds. Lots more “conservative” bond funds try to juice their returns by holding a small slice in high-yield. Regulations let them do this, within limits, but these funds are so huge the assets add up.

This game could fall apart very quickly. Any event that triggers redemptions could set off an avalanche.

I don’t know what that event would be, but I’m pretty sure one will happen. My own goal is to be a buyer, not a seller, whenever it occurs. For now, that means holding cash and exercising a lot of patience.

If I’m right, the payoff will be a once-in-a-generation chance to buy quality assets at pennies or dimes or quarters on the dollar. I think the next selloff in high-yield bonds is going to offer one of the great opportunities of my lifetime.

In a distressed debt market, when the tide is going out, everything goes down. Some very creditworthy bonds will sell at a fraction of the eventual return. This is what makes for such great opportunities. They only come a few times in your life.

There will be one in your near future.

via ZeroHedge News https://ift.tt/2U1IWvl Tyler Durden

While Jerome Powell’s highly anticipated Jackson Hole speech was, in the words of Brean Capital’s Russ Certo “underwhelming and anti-climatic”, one couldn’t say the same for the shocking luncheon speech by Bank of England’s outgoing governor, Mark Carney, titled “The Growing Challenges for Monetary Policy in the current International Monetary and Financial System“, where he dedicated no less than 23 pages to a stunning – for a central banker – cause: to describe why the dollar’s  “destabilizing” reserve status role in the world economy has to end, and why central banks need to join together to create their own replacement reserve currency, one potentially tied to Facebook’s new “stablecoin” Libra, although in reality any “Synthetic Hegemonic Currency” as Carney defined it would do.

But first, a quick tangent: the reason we say Carney’s speech was shocking is not for what it proposes – after all, we have long argued that a world in which the dollar’s reserve currency status would be stripped away by the establishment and granted to some alternative – whether gold, or a basket of currencies like the IMF’s SDR, or a cryptocurrency like bitcoin – is coming in posts such as:

• “Game Changer” – Is Libra The Trojan Horse For An SDR-Backed Redesign Of The Global Financial System?
• Did The IMF Reveal That Cryptocurrency Is The New World Order End-Game?
• Bank Of England Boss: China’s Renminbi Will Rival The Dollar As Global Reserve Currency

The argument behind all these articles is simple and two-fold: i) in a fiat world, one can only devalue relative to some other currency, yet we have now reached a point where (as Pimco suggested two years ago when it said the Fed should buy gold to devalue the dollar against it) every currency needs to devalue relative to some hard index outside of the monetary system (Carney’s point is that with a dollar as reserve currency anchor, it is becoming virtually impossible to lower its value even though it’s critical to do that), which means that ii) the unprecedented credit expansion that began when the last peg to gold was broken in 1971 when Nixon ended the Bretton Woods international system, has gone too far, and establishment powers are now seeking a reason to reimpose a hard monetary link: call it a “gold standard” or, more aptly, a “crypto (or stablecoin) standard“

Which brings us to why what Carney said, is shocking: because he not only validated what until recently the “serious experts” (i.e. the vapid, pro-establishment echo chamber with zero financial comprehension) would consider the deranged rambling of tinfoil blogs, but confirmed that – as a member of the establishment – what comes next will be catastrophic.

With that said, the gist of Carney’s speech was largely as expected: he argued that due to the dollar’s dominance of the global financial system, risks of a liquidity trap of ultra-low interest rates and weak growth are growing. In other words, after the US and dollar benefited for decades from being the world’s reserve currency, that status is now hurting not only the greenback and the US economy, but the rest of the world too.

“While the world economy is being reordered, the U.S. dollar remains as important as when Bretton Woods collapsed,” Carney said, even as emerging economies had increased their share of global activity to 60% from around 45% before the financial crisis a decade ago.

And yet, EM currencies did not see a comparable increase in importance, as the dollar was still used for at least half of international trade invoices – five times more than the United States’ share of world goods imports – fuelling demand for U.S. assets and exposing many countries to damaging spillovers from swings in the U.S. economy.

Commenting on possible replacements, Carney mentioned on possible fiat alternative: ” the most likely candidate for true reserve currency status, the Renminbi (RMB)”, which however “has a long way to go before it is ready to assume the mantle.” As such, “for the Renminbi to become a truly global currency, much more is required.  Moreover, history teaches that the transition to a new global reserve currency may not proceed smoothly.”

What he means here is that transitions in the currency reserve hegemon status usually take place during times of war:

Consider the rare example of the shift from sterling to the dollar in the early 20thCentury –a shift prompted by changes in trade and reinforced by developments in finance. The disruption wrought by the First World War allowed the US to expand its presence in markets previously dominated by European producers.  Trade that was priced in sterling switched to being priced in dollars; and demand for dollar-denominated assets followed.

In addition, the US became a net creditor, lending to other countries in dollar-denominated bonds.  Institutional change supported the role of the dollar, with the creation of the Federal Reserve System providing, for the first time, a market-maker and liquidity manager in US dollar acceptances.  This was particularly helpful for promoting the use of the dollar in trade credit, reinforcing its use as a means of payment and invoicing currency.

Not only do reserve status phase changes take place during times of war, the resulting turmoil leads to catastrophic financial consequences, to wit: “The resulting world with two competing providers of reserve currencies served to destabilize the international monetary system, and, some would argue, the lack of coordination between monetary policy makers during this time contributed to the global scarcity in liquidity and worsened the severity of the Great Depression.”

Incidentally, we have previously shown these reserve currency changes with the following chart which has since graced the pages of virtually every other financial publication and website.

Another shocking aspect of Carney’s speech: the sense of urgency in his warning, and the extent of the social turmoil and chaos should policymakers ignore his warning. The BOE head went so far as to admit that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system. In short: we are on the verge of major socio-economic upheaval, and not because some ultra fringer blogger says so, but because one of the most respected central bankers in the world, a former Goldman partner to boot, is warning a financial apocalypse is coming.

As some suggestions to avoid this financial armageddon, Carney pitched what for years had been considered as merely yet another “conspiracy theory”: making the IMF’s SDR a reserve currency, specifically saying that as a first step to reorder the world’s financial system, countries could triple the resources of the IMF to $3 trillion as a better alternative to countries protecting themselves by racking up enormous piles of dollar-denominated debt.

“While such concerted efforts can improve the functioning of the current system, ultimately a multi-polar global economy requires a new IMFS (international monetary and financial system) to realize its full potential,” Carney said.

SDR aside, as noted above Carney noted that China’s yuan as the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready. As a result, the best solution from a stability standpoint would be a diversified multi-polar financial system, something that could be provided by technology.

Enter Facebook, whose upstart “stablecoin” Libra was the most high-profile proposed digital currency to date according to Carney, but it faced a host of fundamental issues that it had yet to address. “As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” the BOE head said.

Such a system could dampen the “domineering influence” of the U.S. dollar on global trade.

But that doesn’t fully answer the question why does Carney think that after nearly a century of betting as the world’s reserve currency, the dollar can’t be the global reserve any more. Conveniently, that is what CNBC’s Steve Liesman asked Mark Carney during an interview following his luncheon speech. This is what Carney said:

MARK CARNEY: The dollar is the global currency, we know that. The challenge is that the U.S. share of the global economy has been reducing. The dollar share of payments – not just financial assets but payments, a lot of payments of countries that have nothing to do with the U.S. make payments in dollars. And what happens in situations like we’re in tonight, where the U.S. to its credit is relatively strong, doing better. The fed has been doing the right thing. They have adjusted policy, they have tightened policy as it was strengthening. Now they’re making – they’re doing the right thing, but they adjusted and it is relatively strong. That means the rest of the world policy is tighter than it needs to be, and that feeds back on the U.S. economy in a way that ultimately slows this economy. And it leads to a substandard outcome. And in a world where you only have limited policy space, it is a dangerous place to be. So, the trade issues we’re talking about are reinforced by the structure of the monetary system….

Now the issue is you don’t just jump to something new overnight. And what we want in a multi polar world, I think we would agree we have European engine, we’ve got the Chinese engine, we’ve got the U.S. engine of this economy, a multi polar world, you need a multi polar currency. The question is how you get there? And I laid out ideas of how you would get there.

STEVE LIESMAN: The bottom line is all of the pressure on the difference in growth around the world would not fall on the dollar exchange rate… It would be spread out if it was a global basket of currency is what you are saying.

MARK CARNEY: It would be spread out as a global basket of currencies. It is better for the system as a whole. It raises that equilibrium level of interest rates.
 

And just like that, the first shot across the bow of the dollar’s reserve status was fired by none other than one of the world’s most respected bankers. Which means that going forward pay especially close attention to how policymakers approach and interpret Trump’s chaotic, unconventional statements: once they begin to emphasize just how destabilizing for the dollar Trump’s unorthodox style is, that will be the beginning of the end for the dollar. That’s when gold and cryptos will go parabolic.

While Carney was not certain what would and should replace the dollar in this brave new world, he was adamant that doing nothing would lead to catastrophe:

“Even a passing acquaintance with monetary history suggests that this centre won’t hold.  We need to recognise the short, medium and long term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world.  Given the experience of the past five years, I will close by adding urgency to Ben Bernanke’s challenge.  Let’s end the malign neglect of the IMFS and build a system worthy of the diverse, multipolar global economy that is emerging.”

In our first take of Carney’s suggestion, we said that was an “Unprecedented, Shocking Proposal.”  Without belaboring this point, we leave the final word to Alt-Market’s Brandon Smith who had some very apt parting words:

[T]he central banks, led by the BIS and IMF, know EXACTLY what they are doing.  I have been warning for years about the globalist plan to undermine the monetary stability of nation states and then replace the dollar itself with a new world reserve alternative for years.  Carney is not the first elitist to suggest this outcome.   Mohamed El Erian, Christine Lagarde, Putin and the Kremlin, not to mention the Chinese central bank have ALL suggested that a new one world currency is coming to replace the dollar.  Largarde even admitted that plans are in motion for a crypto-based global currency model.  I outlined this end game in multiple articles, a few of which can be read HERE, HERE, and HERE. Carney’s statement is not so shocking; it was actually quite predictable. 

The closer we get to the global economic reset, the more central bankers are going to publicly push the idea of a cashless society and a one world currency system. 

Everything the alternative media has warned about for years; all the outcomes other people have called “conspiracy theory”, will soon be treated as “common knowledge”… 

via ZeroHedge News https://ift.tt/2MBjQSW Tyler Durden

Authored by Daisy Luther via The Organic Prepper blog,

You may have noticed lately that the mainstream websites look an awful lot like alternative news sites, trumpeting the economic demise of America. For years, we in the alternative media have been warning our readers to look out because we never really recovered from the 2008 “Great Recession.” We’ve said, “The collapse is already here” only to be blown off by the mainstream as kooks. “Don’t worry,” they said. “Everything is fine,” they said.”

But now…

Only in the past year has talk of recession begun to break out, and only in the past couple of weeks have outlets become aggressive in pushing the notion that a financial crash is just around the corner. The reality is that if one removes the illusory support of central bank stimulus, our economy never left the “Great Recession” of 2008. (source)

This is not to say our economy is in good shape – anyone paying attention knows that we’ve had bad signs for the economy for years, such as stores closing and people being unable to pay their bills. However, as the 2020 election draws near, it’s certainly politically convenient to announce the advent of another recession.

What evidence is there of an economic crisis?

There are all sorts of things going on right now that would make even the most steadfast non-worrier break a sweat. Michael Snyder outlined 11 of them in this article, but four in particular, are of note.

Last week, the “spread between the U.S. 2-year and 10-year yields” turned negative for the very first time in 12 years.  An inversion of the yield curve has occurred prior to every single U.S. recession since the 1950s, and this is one of the most important economic signals that we have seen yet…

…Just like we witnessed in 2008, fear and volatility have returned to Wall Street in a major way.  In fact, so far this month we have already seen the 4th and 7th largest single day point declines in U.S. stock market history…

…According to the Federal Reserve Bank of New York, the probability that a recession will happen within the next 12 months is now the highest that it has been since the last financial crisis…

…President Trump is suggesting that the Federal Reserve should cut interest rates by 100 basis pointsand that the Fed should restart quantitative easing as soon as possible.  Both of those moves would be considered to be “emergency measures” that should only happen if a major economic downturn was imminent. (source)

There are other issues too. For example, just as President Trump added a whole bunch of tariffs to imports from China, our farmers have had a devastating year due to weather. We can look for food prices to climb dramatically as soon as this fall. Photos from all over the country show empty gaps on grocery store shelves. Families are barely getting by and all it takes is one unexpected expense to send some into a tailspin of poverty. The most-searched-for article on my website for the past 2 months has been this onewith the post getting hundreds of hits per day from people who are clearly struggling.

Why is the recession becoming “official” now?

As we head into the 2020 election cycle, it would certainly be convenient to pin an economic disaster on President Trump. Back in August of 2016, Brandon Smith of Alt-Market called exactly this. (Emphasis mine.)

I submit that there is in fact a wider economic crisis on the way, and that the elites plan to use the Brexit and Trump as scapegoats for this crisis.

I have stated this before, but I think the idea needs repeating:  The globalists need the economy to turn unstable in order to create a rationale for a centralized economic authority and a single global currency system.  This is why they have consistently called for a “coordinated global central banking policy” after the Brexit.  This is why they continue to warn of a fiscal crisis even though stock markets remain at all-time highs.

If Hillary Clinton, a well known globalist puppet deep in the bedrock of the establishment, wins the election only to have the economy tank, then the globalists will get the blame.

If Trump is either allowed in office, or is placed in office, and the economy tanks, CONSERVATIVES, the primary enemy of the globalists, will get the blame for the resulting crisis.

To reiterate, the globalists have created the conditions by which an economic crisis can be triggered at the time of their choosing (within certain limits).  They are then either supporting the success of seemingly conservative based movements and candidates, or simply refusing to interfere with them.  This is being done so that the globalists can then blame the crash they created on conservative movements.

This allows them to demonize not just conservatives, but the conservative philosophy in general; labeling it a poisonous ideal akin to fascism.  Their solution?  Erase all elements of conservatism and sovereignty from society for the sake of the “greater good” of the collective.

This is part of the long game. (source)

Note that the article above was written when everyone was pretty sure Hillary Clinton would be the next president. Heck, most of us were absolutely stunned on election night when Trump was named the winner.

The timing of this hullabaloo sure is convenient.

So why in the world is the MSM finally agreeing with the alternative media that we’re on the cusp of a crash? Well, it’s certainly convenient timing as we head into the 2020 election cycle. And I have to quote Brandon Smith again because whether I agree with him politically or not, there’s no doubt that he is absolutely brilliant when it comes to these types of predictions. (Emphasis mine.)

The media should have been reporting on economic crisis dangers for the past 2-3 years.  But, they didn’t give these problems much credence until recently.  So, what changed?

I can only theorize on why the media and the banking elites choose the timing they do to admit to the public what is about to happen. First, it is clear from their efforts to stifle free discussion that they do not want to let the populace know too far ahead of time that a crash is coming. According to the evidence, which I have outlined in-depth in previous articles, central banks and international banks sometimes engineer crash events in order to consolidate wealth and centralize their political power even further. Is it a conspiracy? Yes, it is, and it’s a provable one.

When they do finally release the facts, or allow their puppet media outlets to report on the facts, it seems that they allow for around 6-8 months of warning time before economic shock events occur. In the case of the current crash in fundamentals (and eventually stocks), the time may be shorter. Why?Because this time the banks and the media have a scapegoat in the form of Donald Trump, and by extension, they have a scapegoat in the form of conservatives, populists, and sovereignty activists.

The vast majority of articles flowing through mainstream news feeds on economic recession refer directly to Trump, his supporters and the trade war as the primary villains behind the downturn. The warnings from the Fed, the BIS and the IMF insinuate the same accusation. (source)

If the financial walls come tumbling down under President Trump’s watch, pretty much anyone could beat him in the next election. And this could be a very dramatic change with very real and personal results. If you think you’ve got trouble making ends meet now, just you wait. If you think our laws are restrictive and Big Brother is all over us now, you ain’t seen nothin’ yet.

Will this put a left-wing extremist president in office?

If things continue in this vein, I can’t imagine that President Trump will get a second term. And his potential replacements could be anathema to an independent American way of life. (Emphasis mine.)

The fact is, the hard data shows that economic conditions in the US and in most of the world are far more unstable than they were in 2008.  We are not looking at the crash of a credit bubble, we are looking at the crash of the ‘Everything Bubble’.

The pace of the narrative is quickening, and I would suggest that a collapse of the bubble will move rather quickly, perhaps in the next four to six months. If it does, then it is likely that Trump is notslated for a second term as president in 2020. Trump’s highly divisive support for “Red Flag” gun laws, a move that will lose him considerable support among pro-gun conservatives, also indicates to me that it is likely he is not meant to be president in 2020.  This is another sign that a massive downturn is closing in.

As events are unfolding right now, it appears that Trump has served his purpose for the globalists and is slated to be replaced next year; probably by an extreme far-left Democrat.  There are only a couple of scenarios I can imagine in which Trump remains in office, one of them being a major war which might require him to retain the presidency so the globalists can finish out a regime change agenda in nations like Iran or Venezuela.  This could, however, be pursued under a Democrat president almost as easily as long as Trump and his elitist cabinet lay the groundwork beforehand.

As in 2007/2008, it is unlikely that the mainstream would admit to a downturn that is not coming soon. Using the behavior of the media and of banking institutions as a guide, we can predict with some measure of certainty a crisis within the economy in the near term. Clearly, a major breakdown is slated to take place before the election of 2020, if not much sooner. (source)

Let’s remember quickly what happened in Venezuela right before all hell broke loose there. It was in 2012, only 2 years before the economic collapse became evident to everyone when the Venezuelan government confiscated people’s guns. Shortly thereafter, the government cracked down on “hoarders” and silenced dissent. And we all know what happened next.

What’s next for the United States of America?

I was talking to my 18-year-old daughter yesterday and it was the saddest conversation.  The America I grew up in is certainly not the one that she inherited. She said:

When you were going to school, kids had guns in the back window of their trucks in case they wanted to stop and shoot dinner on the way home. Now, we all know that anyplace we go, we could be shot at any time because that’s the world we live in. We live somewhere that you can’t even go to Walmart or a music concert without risk. You and your friends didn’t have to think about stuff like this when you were my age.

If you politely turn down a boy when he asks you on a date, he blows up your phone with messages calling you a b*tch and a wh*re. He tells you you’re fat and ugly and he threatens you. It happens to me and my friends all the time. You may think that is limited to a certain area or a certain type of boy, but look at the Incel movement and that guy who used his van to run over a bunch of women. [source] And you wonder why people my age date less than when you were my age.

None of my friends have any hope for the future. The food is poison, nobody is healthy, there are very few jobs, and there is a constant threat of violence. You guys joke about Giant Meteor 2020 but we actually hope for it.

That’s the mindset of people who are 18 years old and live in small-town Virginia. We’re not talking about kids in an inner-city ghetto who feel hopeless. That’s the world they’re living in. Is it any wonder that promises of student loan debt forgiveness and safety are appealing to these kids? They have lived their entire formative years under a cloud of school shootings, vile behavior on the internet, and watching their parents struggle financially. Is it at all surprising why they are looking for something different?

Add to all of this a looming economic catastrophe the likes of which we haven’t seen since The Great Depression, and many adults will join my daughter and her friends in wishing for that asteroid strike.

A “paranoid conspiracy theorist” would get stocked up on food, lose his or her guns in an unfortunate boating incident before they get red-flagged, and get prepared for an economic collapse and a constitutional crisis all rolled into one.

As the rash of hardcore censorship continues to increase, rest assured that you will only get the information those pulling the strings in Big Tech want you to have. As has happened throughout history, we’ll see an increase in the division between people who love freedom and people who love “the greater good.”

Things are going to change and it probably won’t work out well for those who treasure independence.

via ZeroHedge News https://ift.tt/320WObI Tyler Durden

A Texas-based company recently raised $4.5 million in seed funding to develop and commercialize a revolutionary motor that produces more torque, double the power, and increases range in an electric vehicle versus one using a typical electric motor.

Linear Labs has big claims for its Hunstable Electric Turbine (HET), is expected to perform much better than conventional electric motors found on a Tesla or any other electric vehicle.

Vehicles with HET motors will eliminate transmission systems, will increase range by more than 10% from a current battery size while allowing the vehicle to have more power and torque.

Linear Labs says the new motors can produce 2 to 5 times more torque output of similarly-scaled conventional electric motors, and twice the power output.

Here’s the breakthrough technology explained by CNET:

“HET uses four rotors rather than the single unit found in many electric motors that acts on the motor’s coils to create rotation. The number of coils that the rotors interact with is variable thanks to endplates that can be rotated independently so that they weaken the magnetic fields acting on them, allowing the HET to be infinitely variable for power and torque.”

Here, Linear Labs describes HET’s technology as the first significant advancement in electric motors in more than a century.

Several quotes from independent researchers stand out in the video:

“You built the holy grail in electric motors-high torque and no gearbox,” said Henrik Christensen, author of US Robotics National Roadmap Advisor to the President.

HET generates a lot of torque at lower RPMs than a conventional permanent magnet motor, which means it can be constructed out of less expensive and widely available iron ferrite magnates, rather than expensive neodymium. Neodymium is used in motors where maximum torque is produced at high speeds, but it works similarly to iron ferrite at lower RPMs.

This breakthrough would allow US EV manufacturers to ditch sourcing of neodymium from China, and use cheaper and widely available ferrite magnates from other countries.

Linear Labs is currently building prototypes of its new motors for use in various industries. The first transportation application will be in micro-mobility (scooters, electric longboards, e-bikes, and motorcycles) next year, followed by electric cars in 2021.

via ZeroHedge News https://ift.tt/2Z9iF3M Tyler Durden

Authored by Wolf Richter via WolfStreet.com,

Now they’re clamoring for this NIRP absurdity in the US. How will this end?

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

Now there is talk everywhere that the United States too will descend into negative interest rates. And there are people on Wall Street and in the media that are hyping this absurd condition where government bonds and perhaps even corporate bonds, and eventually even junk bonds have negative yields. All of that NIRP absurdity is already the case in Europe and Japan.

There is now about $17 trillion – trillion with a T – in negative yielding debt in the world, government and corporate debt combined.

This started out as a short-term emergency experiment. And now this short-term emergency experiment has become the new normal. And now more short-term emergency experiments need to be added to it, because, you know, the first batches weren’t big enough and haven’t worked, or have stopped working, or more realistically, have screwed things up so badly that nothing works anymore.

So how will this end?

The ECB rumor mill over the past two weeks hyped the possibility of a shock-and-awe stimulus package, on top of the shock-and-awe stimulus packages the ECB has already implemented, namely negative interest rates, liquidity facilities, and QE.

The entire German government bond market, even 30-year bonds have negative yields. And the German economy shrank in the last quarter. That gives Germany two out of the last four quarters where its economy shrank – despite negative interest rates from the ECB and despite the negative yields on its government bonds, and despite the negative yields among many corporate bonds.

In other words, the German economy, the fourth largest in the world, is hitting the skids despite or because of negative yields. And now the ECB wants to flex its muscles to get yields to become even more negative.

And there are folks who want to prescribe the same kind of killer application to help out the US economy – which is growing just fine.

Since the ECB’s shock-and-awe package started to appear in the rumor mill at the beginning of August, the European bank stock index – it includes banks in all EU countries, not just those that use the euro – well, since that shock-and-awe rumor appeared, the stock index for those banks has dropped 11%.

Negative interest rates are terrible for banks. They destroy the business model for banks. They make future bank collapses more likely because banks cannot build capital to absorb losses. But banks are a crucial factor in a modern economy. It’s like an electric utility. You can somehow survive without electricity, but a modern economy cannot thrive without electricity. Same thing for the role commercial banking plays.

So that 11% drop of the bank-stock index wasn’t from some bubble high, but from a hellishly low level. The index is now down 78% from the peak in 2007. And it’s back where it had first been in 1990. So that was, let’s see, nearly three decades ago.

European banks are sick, sick, sick. And with negative yields, they’re getting the exact opposite of what they need. No wonder that bank stocks reacted skittishly to the threat of more deeply negative interest rates.

In Japan, same thing. Japan used QE to bring down interest rates long before the term QE was even used. And Japan has had near-zero or below zero interest rates for 20 years. But the bank index has fallen 8% since August 1, when the renewed stimulus rumors started, and closed on Friday at a new multi-year low. And the index is down 73% from where it had been in 2006.

I didn’t even want to look at the bank index going back to Japan’s bubble years in the 1980s. Because that would have been masochism. But I did look. The TOPIX Banks Index peaked at 1,500 in 1989, and now it’s at 129. Let that sink in for a moment: It has plunged by 91% over those 30 years.

So zero-percent interest rates and worse, negative interest rates, are terrible for banks for the long term. And because they’re bad for banks, by extension, they’re also bad for the real economy that relies on banks to provide the financial infrastructure so that the economy can function.

Commercial banks need to take deposits and extend loans. That’s their primary function. This credit intermediation, as it’s called, is like a financial utility. One bank can be allowed to fail. But the banking system overall cannot be allowed to fail. That would be like the lights going out. So, there needs to be special regulations, just like there are regulations on electric utilities.

And banks need to make money with their primary business. The profit motive needs to make them aggressive on lending, and the fear of loss needs to make them prudent. Those two forces are supposed to balance each other out over time, with banks swinging too far in one direction and then too far in the other direction as part of the normal business cycle.

And this generally works, with some hiccups, as long as banks can do this profitably – meaning they make enough money and set aside enough capital during good times to be able to eat the losses during bad times without collapsing.

In this basic activity, banks make money via the difference between the interest rates they charge on loans to their customers and their cost of funding those loans. This cost of funding is mostly a function of the interest the bank pays on its deposits, on the bonds it has issued, and the like.

If interest rates go negative, the spread the bank needs in order to make a profit gets thinner. But risks get larger because prices of the assets used as collateral have been inflated by these low interest rates. At first this is OK, but over a longer period, this equation runs into serious trouble.

Negative interest rates drive banks to chase yield to make some kind of profit. So they do things that are way too risky and come with inadequate returns. For example, to get some return, banks buy Collateralized Loan Obligations backed by corporate junk-rated leveraged loans. In other words, they load up on speculative financial risks. And as this drags on, banks get more precarious and unstable.

This is not a secret. The ECB and the Bank of Japan and even the Swiss National Bank have admitted that negative interest rates weaken banks. The ECB has even been talking about a strategy to “mitigate” the destructive effects its policies have on the banks.

So that’s the issue with negative interest rates and banks. They crush banks.

In terms of the real economy, negative interest rates have an even more profoundly destructive impact: They distort or eliminate the single-most important factor in economic decision making – the pricing of risk.

Risk is priced via the cost of capital. If capital is invested in a risky enterprise, investors demand a larger return to compensate them for the risk. And the cost of capital for the risky company is higher. If capital is invested in a low-risk activity, the return for the investor and the cost of capital for the company should both be lower. And the market decides how that pans out.

But if central banks push interest rates below zero, this essential function of an economy doesn’t function anymore. Now risk cannot be priced anymore. The perfect example of this: Certain junk bonds in Europe are now trading with a negative yield. This shows that the risk-pricing system in Europe is kaput.

When risks cannot be priced correctly anymore, there are a host of consequences – all of them bad over the longer term for the real economy. It means malinvestment and bad decision making; it means overproduction and overcapacity. It means asset bubbles that load the entire financial system up with huge risks because these assets are used as collateral, and their value has been inflated by negative yields.

So you get these strange combinations – for example, of massive housing bubbles in cities like Berlin and Munich and other places, while at the same time Germany has one foot in a recession.

And as a remedy to this situation caused in part by negative interest rates, the ECB wants to do a new shock-and-awe package, on top of the ones it has already done, driving interest rates even deeper into the negative.

The longer negative interest rates persist, the more screwed up an economic system becomes. And the more deep-seated the dysfunction is, the harder it is for this economic system to emerge from this screwed-up condition without some kind of major reset.

And a major reset is of course precisely what every central bank fears the most.

How will this end? No one knows because no one has ever done this before. But we have some idea: So far, the outcomes are already bad, and now, because the outcomes are already bad, they’re wanting to drive interest rates even lower to deal with the bad outcomes that these low interest rates have already caused.

When you start thinking about it long enough, cooking up negative interest rates is like making hugely important economic decisions purposefully in the worst possible way, in order to disable the proper functioning of the economy. And when the economy stops functioning properly, these folks are surprised and then cook up even more deeply negative interest rates to solve the problem these negative interest rates have already caused.

It’s like watching some cheap slapstick farce, and you want to laugh at all this idiocy going on in Europe and Japan. But this isn’t a farce. It’s central bank policy making in all its glorious worst.

You can listen to and subscribe to my podcast on YouTube.

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After last Sunday’s first ever Pentagon test of a previously banned ground-launched cruise missile with a range of over 500km in a post-INF treaty world, Russian President Vladimir Putin on Friday said he has ordered a reciprocal response, meaning the Kremlin will likely soon conduct its own highly visible land-based missile test. 

The Pentagon on Monday confirmed the flight test of a “conventionally configured ground-launched cruise missile” held at a base in California the day prior, and released video of the launch. 

WATCH: U.S. flight-tests ground launched Tomahawk variant off of California in a test that went “more than 500km”, a first since the end of the INF treaty earlier this month. Notable that they chose the Tomahawk as the original ground-launched version of it was killed by INF pic.twitter.com/aIPKRFHdvC

— Jeff Martin (@JeffMartinDC) August 19, 2019

In his remarks before Russia’s Security Council on Friday, Putin was scathing in his reaction to the US missile test as well as American Defense Secretary Mark Esper’s recent signalling of a possible missile deployment to Asia “sooner than later”. Putin said any planned Asia-Pacific region US deployment “affects our core interests as it is close to Russia’s borders”.

“All this leaves no doubts that the real intention of the United States (in exiting the INF pact) was to… untie its hands to deploy previously banned missiles in different regions of the world,” Putin said.

Given that the latest Pentagon test took place at a range in California on Aug. 18 – a mere 17 days after the final and formal US pullout of the landmark Intermediate-Range Nuclear Forces treaty, Russia’s Defense Ministry said it was clear evidence that Washington had already been in breach of the treaty prior to its official end, given the technology development and extensive preparations that went in to such a test. 

Pentagon releases video of a land-based cruise missile test, the first test of its kind conducted since the U.S. pulled out of the Intermediate-Range Nuclear Forces Treaty earlier this month. https://t.co/B0cYb0qMPv pic.twitter.com/zCYZ8pF2KM

— ABC News (@ABC) August 19, 2019

In the days after the INF-banned missile test, Russia said it would seek to avoid a new “costly arms race” but that the US had “obviously taken a course towards escalation of military tensions,” according  to prior statements of Russia’s deputy foreign minister, Sergei Ryabkov.

Also in reaction to the new US test, China and Russia were united this week in condemning the potential unleashing of a new Cold War arms race 2.0, with the Chinese Foreign Ministry issuing a statement saying, “This measure from the US will trigger a new round of an arms race, leading to an escalation of military confrontation.”

via ZeroHedge News https://ift.tt/2MD4Y6C Tyler Durden

Authored by via The American Institute for Economic Research,

The announcement that President Trump would nominate Judy Shelton, a long-time advocate of the gold standard, for a seat on the Federal Reserve’s Board of Governors got Paul Krugman thinking: why do some economic commentators become goldbugs?

Krugman offers a rather cynical view. It is difficult “to build a successful career as a mainstream economist,” he writes.

Parroting orthodox views definitely won’t do it; you have to be technically proficient, and to have a really good career you must be seen as making important new contributions — innovative ways to think about economic issues and/or innovative ways to bring data to bear on those issues. And the truth is that not many people can pull this off: it requires a combination of deep knowledge of previous research and the ability to think differently. 

So what’s an aspiring if not so smart or creative economist to do?

“Heterodoxy,” Krugman writes, “can itself be a careerist move.”

Everyone loves the idea of brave, independent thinkers whose brilliant insights are rejected by a hidebound establishment, only to be vindicated in the end. And such people do exist, in economics as in other fields.… But the sad truth is that the great majority of people who reject mainstream economics do so because they don’t understand it; and a fair number of these people don’t understand it because their salary depends on their not understanding it.

In other words, Krugman suggests most gold standard advocates are either ignorant or disingenuous – and, in some cases, both.

According to Krugman, “events of the past dozen years have only reinforced that consensus” view that “a return to the gold standard would be a bad idea.” 

[T]he price of gold soared from 2007 to 2011; if gold-standard ideology had any truth to it, that would have been a harbinger of runaway inflation, and the Fed should have been raising interest rates to keep the dollar’s gold value constant. In fact, inflation never materialized, and an interest rate hike in the face of surging unemployment would have been a disaster.

Is that so?

Krugman commits two mistakes here.

First, he implicitly assumes that the data-generating process for the dollar price of gold would have been the same if, over the period in question, the U.S. had been on a gold standard. Robert Lucas famously warned against such an assumption. The argument is straightforward. Individuals do the best they can given their institutional constraints. If those institutional constraints change, so too will the decisions individuals make and, hence, the data generated by those decisions.

Consider that many see gold as a hedge against inflation today. But there would be no scope for gold to serve as an inflation hedge under a gold standard. In other words, the decision to hold gold under a gold standard would be fundamentally different from the decision people face today.

The second error concerns Krugman’s characterization of the gold standard. The gold standard is not a system where the price of gold is fixed. Rather, it is a system where the dollar is defined as a particular weight of gold. Under a gold standard, the dollar price of gold cannot change because the dollar is gold.

Krugman’s mischaracterization of the gold standard as a system where the price of gold is fixed leads to a fundamental misunderstanding about how a gold standard operates. The gold standard does not require a central bank to raise or lower rates “to keep the dollar’s gold value constant,” as Krugman claims. Indeed, a central bank is wholly unnecessary. 

Under a gold standard, the purchasing power of gold is determined by the ordinary forces of supply and demand. If the demand for gold coins increases, the purchasing power of gold will rise (i.e., dollar coins buy more goods and services). Miners respond to the higher purchasing power by digging up more gold and hauling it off to the mint to be coined. And, as the supply of monetary gold expands, the purchasing power gradually falls back to its long-run level. Likewise, if the demand for gold coins falls, less gold is mined and some existing coins are melted down and repurposed for nonmonetary ends. This automatic mechanism meant that the price level was much easier to forecast under the gold standard.

What about Krugman’s claim that the gold standard would have required contractionary monetary policy from 2007 to 2011, when many economists would have called for expansionary monetary policy? Wrong and wrong. It would not have called for any kind of policy — just individuals pursuing their own interests, as usual. And, since the purchasing power of gold was increasing over the period, it would have set in motion an expansion in the supply of money — not a contraction, as Krugman claims.

We won’t take issue with Krugman’s working model of the economics profession. No doubt many drift to unconventional views because they do not understand mainstream economics or find it in their interest to hold unconventional views. Advocacy of the gold standard, an unconventional view, is no exception. 

Unlike Krugman, however, we do not believe the problem is limited to those holding unconventional views. Many economists have strong opinions about the gold standard. Few seem to understand how a gold standard functions and how such a system performed historically relative to modern fiat-money regimes. Krugman provides a case in point.

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Hong Kong riot police unleashed on protesters Saturday after a tense standoff resulted in beatings and the deployment of tear gas for the first time in over a week, according to CNA. 

In Kowloon Bay, police charged protesters who were not in pre-approved rally areas for what is now the city’s 12th week of protests. 

Around mid-afternoon, protesters at a police station used bamboo rods and plastic traffic barriers to build barricades, while other set things on fire in the street. 

“Protesters are simply not able to defend themselves. Police are abusing their powers,” one man told The Guardian. 

Tear gas outside Ngau Tau Kok police station – I saw at least two people being arrested when the police advanced pic.twitter.com/2W6rQTD5bh

— Aaron Mc Nicholas (@aaronMCN) August 24, 2019

Down with ‘smart lampposts’ 

The central theme of this weekend’s protests is widespread opposition to the city’s installation of so-called ‘smart lampposts’ which are equipped with censors, closed-circuit cameras, and are connected to the net. While the government says they are only for the collection of air quality, traffic and weather data, protesters say they’re part of the state surveillance apparatus. 

Protesters used an electric saw to cut down one such lamppost – with others pulling at it with ropes. The demonstrators shielded their faces with masks and umbrellas to avoid facial recognition. 

A smart lamppost is down in Kwun Tong. The Chinese note says no totalitarian surveillance #HongKongProtests #antiELAB #香港 pic.twitter.com/m1Pbk6IDEO

— Bloomberg TicToc (@tictoc) August 24, 2019

Inside the “smart” lamppost, any IT experts know what these are? Protesters who cut off the power cords just told me that the gov didn’t even lock the lamppost. “It feels like they are waiting for us to come over and take it down.” #antiELAB pic.twitter.com/WziK4eRDJl

— 劉修彣 Liu Hsiu Wen (@liuhsiuwen) August 24, 2019

BREAKING: Hong Kong protesters took down a “smart lamppost” and found suspicious Chinese-made components that could facilitate state surveillance. The HK government previously announced plans to fill the city with them to “collect traffic and weather data.” The plot thickens… pic.twitter.com/DahcFSr0Rc

— Jason Y. Ng (@jasonyng) August 24, 2019

The ongoing demonstrations are aimed at pressuring Hong Kong leadership to respond to their political demands – namely, the complete withdrawl of a controversial extradition bill which allows mainland China to pluck Hong Kong residents out of the country for trial. Protesters are also demanding the establishment of an independent body to investigate police violence, and finally – the free election of Hong Kong’s leaders and legislature. 

On Friday night, protesters formed a 28-mile-long human chain as people turned out for a peaceful demonstration similar to 1989 anti-Soviet protests in Estonia, Latvia and Lithuania.

Protests tonight in Hong Kong are insane. Human chain goes on for miles. An American flag at the center. pic.twitter.com/ymdOsPnmyh

— Paul Joseph Watson (@PrisonPlanet) August 23, 2019

There have been numerous skirmishes between riot police and protesters since the protests began, as one of the world’s “safest” financial hubs has become a battle zone. 

via ZeroHedge News https://ift.tt/2HoMjqX Tyler Durden