Media Waging ‘Psychological Warfare’ Against Trump With Warnings Of Looming ‘Staff Exodus’

We’ve heard this one before…

Even as polls have shown that Democrats’ efforts to stymie the confirmation of Supreme Court Justice Brett Kavanaugh, as well as their continued support for open borders as a migrant caravan trudges ever closer to McAllen, Texas, have only galvanized Republican voters ahead of the Nov. 6 midterms, the mainstream media has continued to push the narrative that the imminent blue wave will almost certainly wrest control of the House away from the GOP, forcing Trump and his cabinet officials into an uncomfortable position, as Democrats leverage their newfound power to subpoena staffers, senior officials and perhaps even the president himself. Fearful of being caught up in a drama with potential legal ramifications, Trump administration officials are preparing for a mass exodus during the lame-duck session that could leave the West Wing and the bureaucracy dangerously understaffed, according to Politico, Bloomberg and several other media organizations, all of which have in recent days published stories about rumored staff departures.

Trump

The message from the mainstream media is clear: After a surprisingly successful run at the helm, the Trump administration is finally sinking under the weight of the profusion of scandals, and with key officials like White House counsel Don McGahn II already on their way out, it’s unclear who, exactly, will act as a bulwark between Trump and his political enemies.

As Steve Bannon said, staffers, the majority of whom aren’t well paid, are worried that they will find themselves embroiled in some legal fiasco that might force them to blow all of their savings on legal fees.

“How do you restaff with top quality folks knowing that you’re going to be subpoenaed? If you go in, you better be wealthy because you’re going to need to pay a lawyer,” said Steve Bannon, the former White House adviser who has had to hire his own lawyer to respond to inquiries about his time in the administration. “This whole thing is psychological warfare, and it’ll affect the ability to attract great people.”

According to Bloomberg, the White House is bracing for a “staff exodus” after Nov. 6 as many in the administration believe Democrats will almost certainly take back the House. Anxious staffers, according to BBG, are worried that Democrats could unleash a flurry of subpoenas and investigations.

While talk of a ‘red wave’ hasn’t stopped entirely, it has slowed, as Trump’s political advisers coordinate a strategy for shifting blame from the president to Congressional candidates who have struggled to out-raise their Democratic opponents. Trump has privately complained that Republicans haven’t done enough to engage donors, while Democrats have more easily tapped into the culture of outrage that has inspired wave after wave of unruly street demonstrations.

According to an aggregate poll from Real Clear Politics, Democrats are leading by 8 points, which suggests that they will take back the House. 

RCP

And although polls have been wrong before, they also have suggested that it’s equally likely Republicans will expand their majority in the Senate, as no fewer than 10 Democrats are up for reelection this cycle in states that went for Trump in 2016. As poll after poll has shown, Trump’s approval rating among Republicans has steadily improved since his inauguration and currently stands above 80%.

But even if Republicans do manage to hold on to the House and Senate, another wave of spring cleaning in the upper ranks is all but assured, according to Politico, which named six Trump cabinet officials or senior staff who are expected to leave – or be fired – after the midterms. They include John Kelly, Jeff Sessions, Kirstjen Nielsen, Ryan Zinke, James Mattis and Wilbur Ross. Ultimately, the administration is hoping to remold the cabinet into less of a political liability, as the numerous corruption scandals involving using public funds for private travel to overspending on furniture have tarnished the administration, per Politico.

In the president’s first two years in office, his Cabinet has seen far greater turnover than those of presidents Bill Clinton, George W. Bush and Barack Obama over the same time period, according to a Cabinet tracker by the Brookings Institution.

“Getting people vetted and confirmed is no easy thing, even if the Republicans keep their majority in the Senate,” said Chris Lu, White House Cabinet secretary during Obama’s first term. “It could be well into 2019 before the president has a full Cabinet that is up to speed and carrying out his agenda.”

White House staff members have felt exasperated over the past two years by a Cabinet that has felt uncontrollable. While Cabinet officials are always quick to offer pledges of loyalty to Trump during in-person meetings in the Cabinet room, some Trump aides have complained that some of those same officials show little interest in traveling to promote the president’s legislative and political agenda.

Nor have Cabinet officials always accepted the help or advice of the White House communications and press team to prep for contentious hearings, or media interviews.

The goal for 2020 is to ensure that the Cabinet is a political asset — not a source of embarrassing headlines.

But as long as the GOP retains control of the Senate, Democrats won’t be able to easily stop Trump from pushing through confirmations. And just as the last round of “spring cleaning” earlier this year saw Trump shake up his cabinet for the better, change on the personnel front isn’t necessarily bad. Though we imagine the media will continue to fixate on the turnover rate while paying little attention to how well each cabinet official is doing their job.

 

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A Godfather Story (Or How To Get Out From The Game Of Markets)

Authored by Ben Hunt via EpsilonTheory.com,

“Just when I thought I was out, they pull me back in!”

It’s one of the most famous quotes in movies, as Michael Corleone rages in Godfather III over the assassination he narrowly avoided and his inability to steer the family into legit businesses.

Michael is what I like to call a coyote, someone who is VERY smart and VERY strategic. Actually, too smart and too strategic for his own good, what a Brit would call too clever by half.

That’s in sharp contrast to his father, Vito Corleone, who is no less smart and no less strategic, but is somehow far less conniving and far more beloved.

You see this difference in character most clearly in the deaths of Vito and Michael.

How does Vito Corleone die? Playing in his vegetable garden with his grandson. At home. Surrounded by life and laughter and plenty of bottles of Chianti.

Vito got out.

How does Michael Corleone die? Sitting in a stony Sicilian courtyard as two skinny dogs scurry around. Struggling to peel an orange. All dressed up and no place to go. Alone. Utterly alone.

For all his smarts and strategy and cleverness, Michael NEVER got out.

How did Vito get out, while Michael failed? I think it’s the whole too-clever-by-half coyote thing. Michael never trusted ANYONE in the way that Vito did. Michael was obsessed with finding the Answer, an impossibility in the game of organized crime. Or the game of markets. 

Michael was a maximizer.

Which is another way of saying that, like most coyotes, he wasn’t very good at the metagame.

Do you want OUT from the game of markets?

I do.  

Am I good at the game? Yeah. Do I enjoy it? Not really. I used to. But ever since Lehman it’s been mostly a drag. And that’s okay! The game of markets is a means to an end. It’s a really big, important game, but it’s only one of several big important games within the larger metagame of life and doing.

My goal in doing is to have a happy ending. I want the Vito ending, not the Michael ending.

How do we get there? We keep our eye on the prize – the happy ending – and we work backwards. We maintain our vision on the metagame and its outcome even while we play the immediate game.

My goal as an investor is NOT to maximize my investment returns or to maximize my personal wealth. That’s myopic thinking. That’s coyote thinking. That’s the sort of thinking that ruined Michael.

My goal as an investor is to minimize my maximum regret in the metagame. What is that maximum regret? Dying alone. Failing to protect and sustain my pack, both at the most personal level of family and the broadest level of humanity. Minimizing the risk of THAT is what drives my doing, in both politics and in markets. I want enough wealth to avoid the bad ending, not the most wealth I can possibly achieve, because going for the most wealth I can possibly achieve actually increases the chances of the bad ending.

You will NEVER get out of the immediate game, whether it’s the mafia game or the markets game, if you play that game as a maximizer. You will ALWAYS be pulled back in.

And yet, all of our dominant ideas about financial advice – ALL OF THEM – are based on the assumption that we are maximizers. Every bit of Modern Portfolio Theory – ALL OF IT – is based on assumptions of maximization. All of those Big Bank model portfolios that are handed down from on high every month – ALL OF THEM – are based on the assumption that we are maximizers. Worse, all of these ideas about economics and investing aren’t just based on the assumption that we ARE maximizers. All of these core ideas about financial advice are based on the narrative that we SHOULD BE maximizers.

The business of financial advice is hurting. We all know that. It’s hurting for its practitioners and it’s hurting for its clients. I think it’s hurting because the narrative of maximization, in both its descriptive and its normative forms, gives particularly poor outcomes when Things Fall Apart. It gives particularly poor outcomes when the gravity of a Three-Body System makes the ground beneath our feet quiver and shake.

In order to survive … in order to do better for clients … the business of financial advice needs a new narrative, one based on what truly matters for practitioners and clients alike in a world of profound uncertainty.

What is the new narrative for financial advice?

I think it’s regret minimization in the metagame rather than reward maximization in the immediate game.

I think it’s Clear Eyes and Full Hearts.

A new narrative isn’t just possible. It’s necessary. And it’s happening.

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Stocks, Yuan Tumble On Report US To Announce Tariffs On All China Imports If Trump-Xi Meeting Fails

It has been a while since the market was reminded of how quickly and violently it can be rocked as a result of Trump’s mood swings, and moments ago it got a quick refresher when Bloomberg reported that the U.S. is preparing to announce by early December tariffs on all remaining Chinese imports if next month’s talks between presidents Donald Trump and Xi Jinping fail to ease the trade war.

As Trump had threatened previously, the latest tariff list would would apply to all imports from China that aren’t already covered by previous rounds of tariffs which would add up to $257 billion using last year’s import figures.

The latest trial balloon may also serve to remind Beijing that the Trump administration remains willing to play hard ball and is prepared to escalate the trade war with China even as companies complain about the rising costs of tariffs and financial markets continue to be nervous about the global economic fallout.

U.S. officials are preparing for such a scenario in case a planned Trump-Xi meeting yields no progress on the sidelines of a Group of 20 summit in Buenos Aires in November, according to two of the people, who declined to be identified to discuss internal deliberations. They cautioned that final decisions had not been made.

According to Bloomberg, the early-December announcement of a new product list would mean the effective date following the mandatory 60-day public comment period, would coincide with China’s Lunar New Year holiday in early February.

In previous months, the U.S. already imposed tariffs on $250 billion in trade with China. After 10% percent tariffs on $200 billion in imports that took effect in September, and are set to increase to 25% on Jan. 1, Trump also threatened to impose tariffs on the remaining goods imports from China, which last year were worth $505 billion.

“We are in the middle of a pretty nasty dispute. We’re in a trade dispute — I want to use that word because it’s a nice, soft word — but we’re going to win,” Trump said on Saturday at an event in Indiana. “You know why? ’Cause we always win.”

As Bloomberg also reports, another option considered by the White House is to exclude trade from the meeting agenda but it is unlikely to cancel it altogether.  White House Press Secretary Sarah Huckabee Sanders on Thursday said a meeting between Trump and Xi at the Nov. 30-Dec. 1 summit was still in the planning stages.

Following the Bloomberg report, stocks promptly slumped to session lows amid fears of even more trade war escalation…

… while the Yuan dropped, and is approaching the lowest level since December 2016.

 

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The Keith Richards Market

Via DataTrekResearch.com,

Markets have been heavy, so let’s start with a light but brief story before digging through some of the important issues as we start the week…

In 1973 the editors of British magazine New Music Express put Keith Richards at the top of their annual “rock stars most likely to die within the year” list. He remained at the top of this stack for the next decade. It was a logical guess, given Keith’s hard driving lifestyle. After a decade, however, NME had to face the inevitable: Keith Richards is immortal.

Plenty of market observers have the 2009 – present bull market on a similar deathwatch, but that story (courtesy of a 2010 New Yorker article) is a good reminder that the seemingly obvious doesn’t always come to pass.

With that, three things to know as we kick off what will certainly be another volatile week in US and global equities:

#1. Last week’s 3.9% selloff for the S&P 500 notwithstanding, corporate earnings reports were actually much better than the prior week. In fact, Q3 earnings season is now actually ahead of the 5-year average “beat” percentage. The numbers (source: FactSet):

  • Through October 19th (when just 17% of the S&P 500 had reported earnings), the average company had beaten their Q3 earnings expectations by 3.9%. The mean year-on-year earnings growth rate was 19.5%.
  • Through last Friday (with 48% of companies reporting), the average S&P company has beaten expectations by 6.5%, above both the prior week and the 5-year average of 4.6%. Average earnings growth now stands at 22.5%, which represents a notable acceleration from last week.
  • Last week’s financial reports also showed better revenue growth than the prior week. The numbers: 7.6% year-on-year growth versus 7.4% last week.

So why did stocks sell off if everything is so good? Worries about the Fed, yes. But despite the better beat percentages, analysts actually cut their Q4 2018 estimates. Last week, they were looking for 16.5% year-on-year growth. Now that number is 16.1%. Wall Street is also reluctant to boost their 2019 numbers, which remained unchanged this week despite the better tone of earnings reports.

Bottom line: Q4 numbers may continue to come down this week even if last week’s better beat rates continue, an unwelcomed development. This is something we did not see mentioned anywhere, but it neatly explains why the pullback has a fundamental as well as macro explanation.

#2. The market’s game of “I double dare you” with the Federal Reserve continues. The latest odds on rate increases (source: CME):

  • Fed Funds Futures show a 30% chance the Fed skips the widely expected December 2018 rate increase. A week ago the odds were 16%.
  • If the Fed does go in December, futures now make the odds of a March 2019 increase at just 40%, down from 50% a week ago.

Bottom line: while Fed Funds Futures may be repricing rates, the 2-year Treasury market isn’t really buying it yet. Yields of 2.81% are the same as at the start of October. That’s important, since this is the most visible measure of riskless opportunity cost for equity investors. We’ll need to see 2-year Treasury rates come down further to see equity prices stabilize, in our opinion.

#3. Trends in US equity sector correlations explains a large part of why the CBOE VIX Index remains lower than feels “right” given recent volatility. The numbers and some background:

  • Back during the February – April 2018 volatility spike, the average S&P 500 sector was 0.80 – 0.80 correlated in terms of daily price action to the S&P 500 as a whole. (We use 30 day trailing correlations for this measure.)
  • Over the last 30 days, the average S&P 500 sector is 0.72 correlated to the index, even with the recent volatility. That is 14% lower than the vol shock earlier this year. Why the difference? Utilities, Consumer Staples and Real Estate are decoupling – something they did not do from February – April.

Bottom line: to our thinking it is a spike in sector correlations that signals an investable bottom for US stocks, and this is an underappreciated input into the behavior of the VIX “fear” Index. Watching correlations worked during the February – April selloff and accurately tracked the 2-month bottoming process. The current 0.72 reading is not yet back to the +0.80 readings that signifies the start of an investable low. In Churchill-ian terms, we’re more at the end of the beginning than the beginning of the end.

Summing up: everything here points to more US/global equity volatility and the real chance for further losses this week. Cuts to Q4 earnings expectations and correlations tell that story well enough. A sticky 2-year Treasury yield only reinforces it. Like Keith Richards, these aren’t likely enough to kill stocks outright. But they are enough where the bearish deathwatch will continue.

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“Palo Alto Mafia” Censoring Conservatives: Trump 2020 Campaign Manager

President Trump’s 2020 campaign manager Brad Parscale renewed his criticism of social media companies on Monday for silencing conservative voices across several platforms, reports CNBC

“I think that when the left found out that Facebook, a tool built by Silicon Valley, helped elect President Trump, they weren’t very happy,” Parscale told CBS This Morning. “And I think that you have multiple platforms I call the ‘Palo Alto mafia’ trying to stop that.”

In the interview, Parscale credited the Trump campaign’s dominance in Facebook advertising as a key contributor to its success in 2016. He referenced the wide gap between the number of Facebook ads Trump and Hillary Clinton placed during the run up to the election. Trump’s team placed 5.9 million ads compared to Clinton’s 66,000. –CNBC

Parscale, who was promoted to Trump’s 2020 campaign manager after spearheading his digital media strategy in 2016, was originally hired to build a website for Trump’s exploratory campaign in 2015. 

Trump and other conservatives have slammed social media platforms over allegations of anti-Republican bias. In July, Trump accused Twitter of “shadow banning” prominent Republicans, vowing to “look into this discriminatory and illegal practice at once!” 

Trump’s tweet came after Brad Parscale, along with Republican National Committee (RNC) Chairwoman Ronna McDaniel, wrote a letter in May calling for the CEOs of Facebook and Twitter to address concerns over conservative censorship ahead of the 2020 election, as well as a call for transparency.

We recognize that Facebook and Twitter operate in liberal corporate cultures,” the letter reads. “However, rampant political bias is inappropriate for a widely used public forum.”

In August, President Trump tweeted that Google is “controlling what we can & cannot see. This is a very serious situation-will be addressed!” 

The GOP controlled congress has explored the issue throughout 2018, with executives from Facebook, Google and Twitter testifying before lawmakers over issues of bias and security breaches. 

In April, Facebook CEO Mark Zuckerberg was questioned on the issue at a congressional hearing.

There are a great many Americans who I think are deeply concerned that that Facebook and other tech companies are engaged in a pervasive pattern of bias and political censorship,” Sen. Ted Cruz, R-Texas, said at the time.

The companies have all said that they do not filter content based on political ideology. –CNBC

And while Facebook and Twitter are allegedly filtering individual users on their platform, Google has been accused of biased search results, providing support to Hillary Clinton in the 2016 election, and making conservative employees feel uncomfortable expressing their opinions. In September, Breitbart obtained and published a leaked video of Google’s top executives crying and comforting each other as they mourn Hillary Clinton’s 2016 election loss. 

What’s more, Google allegedly helped create ads and donated funds to a partisan Latino group which physically bussed voters to cast ballots for Hillary Clinton during the 2016 election. 

This, of course, isn’t the first evidence of Google doing all they could to help Hillary win the election. In an April 15, 2014 email from Google’s then-Executive Chairman Eric Schmidt found in the WikiLeaked Podesta emails, titled “Notes for a 2016 Democratic Campaign,” Schmidt tells Cheryl Mills that “I have put together my thoughts on the campaign ideas and I have scheduled some meetings in the next few weeks for veterans of the campaign to tell me how to make these ideas better.  This is simply a draft but do let me know if this is a helpful process for you all.” 

Parscale claims that even if social media companies exclude conservatives, people will always find a way to spread ideas. 

“There are lots of things they can’t stop,” said Parscale. “And I think one of the big emerging technologies is just your cell phone, direct, rich media, and text messaging, and the things we can do directly through your phones.”

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Google Searches Of “Buyback Blackout” Hit All Time HIgh

Back when the Fed was engaging in quantitative easing, the almost daily Permanent Open Market Operation through which the NY Fed injected liquidity into the market became such a hit with the broader investing public – simply because because stocks tended to outperform on POMO days – that google searches for “POMO” exploded, and hit an all time high shortly after the Fed launched QE1.

Now for the investing public, it’s all about buybacks, and specifically – when do they return?

To be sure, the buyback blackout period which has coincided with the recent market correction has been the subject of intense focus in recent weeks. For proof look no further than the frequency of Google searches for the phrase “buyback blackout” which rose sharply to its highest ever in October.

The reason for this fascination is that, as we discussed yesterday, as the blackout period rolls off for more companies, especially those with large buyback programs, the pace of buybacks will ramp up sharply.

According to Goldman, roughly 48% of S&P 500 firms are now out of their blackout windows and will be able to resume discretionary share repurchases, while Deutsche Bank calculates that this week, companies with $50 billion of quarterly buybacks were off their blackout periods, and the number jumps to $110 billion by the end of next week and to $145bn the following.

And, as we further observed over the weekend, this is arguably the most bullish argument to buy stocks for one simple reason: from a demand-supply perspective, buybacks have been the main driver of the equity rally in this cycle.

In fact, in this centrally-planned market, it very well may be that buybacks – and lack thereof – are one of the key explanations for the change in equity returns.

Commenting on this phenomenon, Deutsche Bank writes that “in the absence of outflows and further positioning cuts, which require incrementally negative news, buybacks should drive equities higher.” Which also explains why the public is so fascinated with just when the dreaded “buyback blackout” period will finally end unleashing the next round of “BTFD.”

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Four Shots Fired Into Florida GOP Headquarters 

Police in South Daytona Florida are investigating after someone fired four bullets through the windows of the Volusia County Republican Headquarters, according to local ABC affiliate WFTV9Nobody was injured in the incident. 

Photo: Daytona Beach News-Journal

Shattered glass and fallen campaign posters littered the sidewalk outside Republican party headquarters. Inside, volunteers pointed to bullet holes in the walls and ceiling.

“We have never had any kind of vandalism before at a Republican Headquarters,” Tony Ledbetter, the chairman of Volusia County’s Republican Party, said in an email Monday morning. “It’s a small strip center and no other business was vandalized, so it was obviously politically motivated.” –Daytona Beach News-Journal

Ledbetter tells the News-Journal that he was the last person to leave the GOP headquarters on Sunday at 4 p.m., while employees at nearby businesses – including an e-cigarette store, a restaurant and a massage parlor had closed by 10 p.m. Nobody heard the shots fired. 

South Daytona police captain Mark Cheatham said “We are working to see if we can get video from nearby businesses but so far we have no witnesses.”

The shooting follows a spate of suspected explosive devices sent from a South Florida man to several prominent Democrats, as well as the Saturday massacre at a Pittsburgh synagogue in which eleven people were killed and six injured including police officers. 

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Trump Is Right: The Fed Is A Big Problem

Authored by Thorstein Polleit via The Mises Institute,

President Donald J. Trump has taken on the Federal Reserve (Fed), saying that Fed chairman Jerome H. Powell is threatening US economic growth by further raising interest rates. Mainstream economists, the financial press and even some politicians react with indignation: the president’s comments undermine the Fed’s political independence, potentially endangering the confidence in the US dollar. Such a public reaction is, at first glance, understandable – as mainstream economists have declared the political independence of the central bank a “golden calf” issue.

Monetary theorists argue that a politically independent central bank is best for the currency and the economy. As a result, most central banks around the world, including the Fed, have been made politically independent. But is this so? Well, if the economy thrives, politicians leave the Fed alone. If the economy stumbles, or if the Fed pursues unpopular measures, it runs the risk that Congress or the president may revise the Federal Reserve At of 1913, stripping it of its power. In fact, the Fed’s monetary policy cannot deviate too much from the Congress’ and the president’s political agenda.

Granted: In good times, the Fed is more or less protected from the demands of political parties. But what about the influence from ‘special interest groups’ such as the banking industry on Fed policymaking? There should hardly be any doubt that the Fed caters, first and foremost, to the needs of commercial and investment banks. As the monopoly producer of the US dollar, it creates – in close cooperation with the banking community – new Greenbacks mostly via credit expansion out of thin air. In this sense, the Fed and private banks represents a cartel.

This cartel produces inflation, leading to increases not only of consumer prices but also of the prices of assets such as stocks, housing and real estate. This, in turn, debases the purchasing power of the US dollar and benefits some at the expense of many. The Fed-banker cartel, which keeps issuing ever more quantities of US dollar, also causes economic disturbances, speculative bubbles, and boom-and-bust cycles; and it tempts consumers, firms, and the government to run into ever more debt. Especially so as the Fed sets the interest rate for bank credit, and in doing so basically controls all interest rates in credit markets.

As the Fed-banker cartel expands the money supply via credit extension, the market interest rate gets artificially suppressed: It is pushed to a level that is lower compared to a situation in which the Fed does not expand the credit and money supply out of thin air. As a result of the lowered market interest rate, savings decline, while consumption and investment go up – setting into motion an economic boom. However, this boom will turn into bust if and when the market interest rate rises – which inevitably happens once no more new credit and money is pumped into the system; if the Fed raises interest rates after having lowered them beforehand.

It might be frightening to hear, but the Fed does not know where the “right” interest rate level is. In terms of interest rate policy, it purses a ‘trial and error’ approach. As history shows all too well, the Fed lowers interest rates sharply in times of financial and economic crisis. If incoming data suggests that the economy is returning to growth, the Fed starts raising the interest rate and keeps raising it until the interest rate becomes ‘too high’, turning the boom into yet another bust. It would not be surprising if the Fed’s current interest hiking cycle were going to trigger yet another debacle.

Viewed from this perspective, President Trump certainly has a point in criticizing the Fed’s latest series of interest rate increases. However, forcing the Fed to keep interest rates at artificially lowered levels for longer does not solve the real problem. It would only lead to more distortions in the financial and economic system, foreseeably increasing the costs of the inevitable crisis even further. In other words: The truth is that Fed policy is not the solution to the problem, it is the most significant part of the problem.

If shutting down the Fed right away is not an option, one path that is open to the president is to end the Fed’s money monopoly. This could be done by, first and foremost, ending all taxes and regulatory requirements standing in the way of using means of exchange such as precious metals, gold and silver in particular, and cyber currencies for monetary purposes. In fact, it would open up a free market in money. People would be getting a greater choice and thus could easily diversify away from the US dollar if they wished without incurring undue costs.

The Fed-banker cartel’s scope of maneuvering would be significantly reduced because they could no longer keep inflating the credit and money supply as before. For if they do, the US dollar will depreciate against alternative monies for all eyes to see, making the Greenback less competitive, potentially driving the US dollar out of the market altogether.

In the early stage of a free market in money, people would presumably divert part of their US dollar savings and time deposits into gold and silver as a store of value. Later, businesses that provide not only storage and safekeeping services but also offer payment and settlement services would emerge, finally opening up the possibility to make daily payments with ‘digitised’ gold and silver money.

If the US administration truly wishes to “To Make America Great Again”, there is no way around addressing the US dollar fiat currency problem at some point. The president’s latest criticism of the Fed’s interest rate policy no doubt points in the right direction. To underpin his criticism with the unquestionably right reasons, it should be accompanied by manifest efforts to set up a free market in money. Fortunately, a good number of US states has already been moving in this direction. President Trump would arguably have the best reasons to follow up – and push for a free market in money on a federal level.

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“Extreme Portfolio Pain” Ahead: Morgan Stanley Expects A “Cyclical Bear Market” Slamming The S&P To 2,400

One day after Goldman reiterated its optimistic outlook on the market, stating that traders appear to have over-reacted to the slowdown signs emerging from both the economy and earnings, despite warning that “risks are rising to the downside” and listing various reasons why the bank’s 2,850 year-end price target may not be hit, Morgan Stanley’s far more bearish equity strategist, Mike Wilson, is out with his latest bearish piece, in which he pours cold water on the “cautiously optimistic” views proposed by his Wall Street peers, and reiterated that “rallies should be sold until the liquidity picture improves, valuations compress further or 2019 earnings estimates are reduced.

Readers will recall, that just one week ago, Wilson warned that his preferred explanation of recent market moves, namely the “rolling bear market” had “unfinished business with the S&P” and two weeks after “the rolling bear market made its latest and loudest statement yet by attacking this bull market’s darlings – Growth stocks, concentrated in the US Technology and Consumer Discretionary sectors” it was going for the overall market itself.

As we further showed, as of two weeks ago, “the rolling bear has now hit virtually every major asset class and the S&P 500 was the final holdout, beating the CPI year to date.”

 

Fast forward to today, when Wilson writes that the “rolling bear market” continues to make progress – having now focused on the S&P directly – and notes that “there is growing evidence that it is morphing into a proper cyclical bear market in the context of a secular bull.”

According to the Morgan Stanley strategist, “it doesn’t take heavy analysis to recognize this market is now approaching bear territory,” and although the S&P 500 is only down 10% from its highs, “40% of US Stocks and almost every sector have fallen 20% at some point from their 52 week highs.

As a result, he believes that “the evidence is building and the message from Mr. Market is clear- The consensus outlook for earnings growth is too rosy next year.

To be sure, market professionals have heard this message loud and clear, and it’s not just the violent market move.

While for the month of October, the S&P 500 is down 8.8% and gave up all of its YTD gains in just 3 weeks, after being up close to 11%, far more importantly for portfolio managers is that these losses were concentrated in the areas of the market where they are most exposed: Tech, Consumer Discretionary, Energy and Industrials; while the best performers were in the generally avoided defensive sectors–Utilities, Staples, and REITs.

While we already know that hedge fund performance in 2018 has been abysmal, this is the latest confirmation of “extreme portfolio pain” leaving most active managers down on the year as well.

Unfortunately for these long-suffering portfolio managers, there is no hope in sight according to Wilson, who writes that the rolling bear market is quickly moving to complete its job with growth stocks (Tech, Health Care and Discretionary) catching up on the  downside and “it won’t be over until this gap is completely closed.”

We showed in last week’s note that growth cyclicals, namely Tech and Consumer Discretionary stocks, have seen their forward P/Es correct by only half as much as the S&P 500 Year to Date. That closed a little more last week but there is still another 5-6 percent to go on a relative basis even if the broader market valuation stabilizes.

But wait, there’s more. Because while traders have been hit with various “rolling bear markets”, Wilson is confident that when looking at the broader market, “this rolling bear is quickly turning into a cyclical bear”, highlighting what he showed in the second chart above that nearly half of all the stocks in the MSCI US Equity Index have now fallen at least 20% from their 52 week high. While this isn’t as bad as 2015 or 2011, the last time the S&P fell close to 20%, “the momentum suggests we may be on our way to those levels if things don’t stabilize soon.

Wilson then shows another was in which the recent drawdown is different from the other corrections we have experienced since 2015, namely that “the 200 day moving average has completely broken for the S&P and most of the sectors and stocks within the S&P 500 are also below their respective 200 day moving averages.”

This tells Morgan Stanley two things:

  1. The Cyclical Uptrend that began in early 2016 has been broken, and
  2. The collapse in the breadth of the market suggests this is more fundamentally driven than most market participants and commentators have acknowledged.

It also tells Wilson that he has been right: in lieu of a victory dance, the strategist writes that “this break is overdue and reflects our primary concerns we have discussed all year”, the same one that most market skeptics have highlighted, namely that “the Fed and other central banks have tightening more than the market (and possibly the economy) can handle and company earnings growth is destined to slow significantly next year thanks to the very difficult comparisons, rising operating costs and a temporary return to fiscal austerity by both companies and the government.”

Commenting further, and referencing the chart above, Wilson says that all year he has been most concerned with the shrinking liquidity conditions as the Fed and other central banks have been tightening monetary policy, and while others may be focused on the neutral interest rate (r*) or the shape of the yield curve, “we have focused on the Global Central Bank balance sheets growth.”

From January’s very healthy 15% y/y rate, these balance sheets’ growth has been plummeting and will go negative by January if the Fed, ECB and BOJ do not change course. Historically, whenever this has happened, we ended up with a financial crisis, a recession or both.

And just in case Wilson wasn’t gloomy enough, he writes that while he has not yet modeled an outright earnings recession next year, he does think that the risk of one is “rising significantly.

* * *

Putting the above together, Wilson repeats that his “bear case target” for this year has always been 2400 – a far cry from Goldman’s 2,850 PT – and assumes a full blown earnings recession next year which is looking more likely.

Meanwhile, with the Fed having to respond to still strong economic data and the desire to remain apolitical, Wilson thinks it could take another 200 S&P points making 2450 a reasonable downside target.

We expect violent rallies along the way but with market liquidity about as bad as we have seen in our careers, trying to capture them will be difficult.

Morgan Stanley’s target also lines up perfect with the 200 WEEK moving average which the bank views as an absolute floor for the S&P at any time during a secular bull market, although if the S&P indeed hits 2,400, expect panic selling to kick in and drag the S&P far lower as every systematic trader bails.

That said, not even Wilson is a permabear and clarifies that its 2400 bear case target should hold throughout this correction which is taking place inside a secular bull market that began in 2011 and this year “represents a cyclical bear within that secular bull.”

We think this cyclical bear is taking the course of a consolidation that will keep the S&P 500 in a wide range of 2400-3000 for up to two years. This was our call back in January and we think there is now ample evidence both technically and fundamentally to support it. Furthermore, our rolling Bear market narrative seems to have captured this outlook quite well.

While the S&P appears to indeed be on its way to 2,400, the only question outstanding is whether the Fed will step in when this support is breached – in line with market expectations of where the “Fed Put” is found

… or if Powell will let the market slide beyond, and instead of a cyclical bear market in a secular bull, the current correction is exposed as the long-overdue breach of what has always been a secular bear market, that was only delayed by 10 years thanks to $15 trillion in central bank liquidity.

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