Category: zerohedge

If markets have been blissfully ignorant of potential fallout from the simmering US-China trade dispute (even if corporate executives are bracing for the worst), just imagine how they would react to the reality of a military confrontation.

Which brings us to an ABC News report published Monday evening detailing just how close Chinese ships came to actively confronting the USS Decatur while the US ship was carrying out yet another in a series of “freedom of navigation” operations – or “freeops” – in the South China Sea. The Navy destroyer had to maneuver to avoid a Chinese ship that came within 45 yards of its bow while the Decatur was sailing through the Spratley Islands on Sunday in what was the closest direct confrontation between US and Chinese ships since Trump’s inauguration (after which the Navy began conducting these freeops with increasing frequency).

The encounter, which comes at a time of strained relations between the world’s two largest economies driven largely by Trump’s aggressive trade policy, was characterized as “unsafe and unprofessional” by Navy officials.

“At approximately 0830 local time on September 30, a PRC LUYANG destroyer approached USS DECATUR in an unsafe and unprofessional maneuver in the vicinity of Gaven Reef in the South China Sea,” said Capt. Charlie Brown, a U.S. Pacific Fleet Spokesman.

Gaven Reef is located in the Spratly Islands chain in the South China Sea where China claims seven man-made islands as its own.

The close encounter with the Chinese warship occurred as the American destroyer was carrying out a freedom of navigation operation (FONOPs) in the Spratlys, the U.S. said.

The U.S. Navy routinely undertakes FONOP missions worldwide to challenge excessive territorial claims of international shipping lanes.

USS Decatur had sailed within 12 nautical miles of Gaven and Johnson Reefs in the Spratly Islands when it was approached by the Chinese destroyer.

During the brief encounter, the Chinese destroyer’s aggressive maneuvers were accompanied by demands that the Decatur leave the area.

The Chinese Navy “destroyer conducted a series of increasingly aggressive maneuvers accompanied by warnings for DECATUR to depart the area,” Brown added.

“The PRC destroyer approached within 45 yards of DECATUR’s bow, after which DECATUR maneuvered to prevent a collision,” said Brown.

A U.S. defense official characterized the close encounter as having been of short duration.

Chinese vessels have approached U.S. Navy ships during previous FONOPs in the South China Sea, but Sunday’s encounter appears to the be the closest one yet.

“U.S. Navy ships and aircraft operate throughout the Indo-Pacific routinely, including in the South China Sea,” said Brown. “As we have for decades, our forces will continue to fly, sail and operate anywhere international law allows.”

Earlier Monday, reports surfaced that China had called off a security conference with US officials. The cancellation was later confirmed by the US. This latest sign of a deteriorating relationship came after the US Air Force flew a B-52 bomber on a mission through the East China Sea while two other B-52 flights were carried out through the South China Sea.

While the the notion of a shooting war between the US and China may seem remote to casual observers, some market observers have noted the time honored progression of economic tensions like trade wars and currency wars eventually leading to a full-on hot war.

At the very list, it’s a risk that certainly deserves attention.

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Authored by James Rickards via The Daily Reckoning,

The U.S. trade war with China and China’s daunting debt problems are well understood by most investors. Coming U.S. sanctions on Iran and Iran’s internal economic problems are also well understood.

What is not understood is how these two bilateral confrontations are intimately linked in a three-way tangle that could throw the global economy into complete turmoil and possibly escalate into war. Untangling and understanding these connections is one of the most important tasks for investors today.

Let’s begin with the China debt bomb. As is apparent from the chart below, China has the largest volume of dollar-denominated debt coming due in the next 15 months.

The chart shows China with almost $100 billion of external dollar-denominated liabilities maturing before the end of 2019. But this debt wall is just the tip of the iceberg. This chart does not include amounts owed by financial institutions nor does it include intercompany payables and receivables. China’s total dollar debt burden is over $200 billion and towers over other emerging-market economy debt burdens.

This wall of maturing debt might not matter if China had easy access to new finance with which to pay the debt and if its economy were growing at a healthy clip. Neither condition is true.

China has entered a trade war with the U.S., which will reduce the prospects of many Chinese companies and hurt their ability to refinance dollar debt. At the same time, China is trying to get its debt problems under control by restricting credit and tightening lending standards.

But this monetary tightening also hurts growth. Selective defaults have already emerged among some large Chinese companies and certain regional governments. The overall effect is tighter monetary conditions, reduced access to foreign markets and slower growth all coming at the worst possible time.

The situation in Iran is even more fraught. The U.S. waged a financial war on Iran from 2011–13. The first step was to impose sanctions on Iranian individuals and entities. Then Iran was banned from using the U.S.-controlled Fedwire system to send or receive U.S. dollars.

Iran responded by switching its oil shipments to payment in euros cleared through the SWIFT system, based in Belgium. Next the U.S. leaned on its SWIFT partners to ban Iran from using that system, a process known as “de-SWIFTing.”

This move effectively cut Iran off from receiving hard currency for its oil. Iranians smuggled dollars into Iran from Iraq and ran a black market to get dollars to pay Dubai-based smugglers to bring in consumer goods. There was a run on the Iranian banks, interest rates were moved to 20% to stop the run and the Iranian rial collapsed. Inflation soared and anti-government demonstrations emerged. Iran was halfway to regime change without a shot being fired.

Obama declared a truce in the financial war at the end of 2013 in exchange for negotiations on the Iranian nuclear program. This resulted in the 2015 Joint Comprehensive Plan of Action, JCPOA, a multilateral agreement on Iran’s pledge to stop uranium enrichment. Obama paid billions of dollars in cash and gold to Iran as a bribe to secure this agreement.

After the agreement, Obama ended many economic sanctions on Iran. Direct foreign investment, mostly from Europe, started up again.

Last May, Trump tore up the JCPOA and resumed sanctions under a doctrine of “maximum pressure.” The difference now is that Iran wasted the Obama bribe money on foreign adventures and terrorism in Iraq, Yemen, Syria, Lebanon, Gaza and Sinai. The situation in Iran today is even worse that it was in 2013.

A new round of severe sanctions is set to go into place on Nov. 4, 2018. These new sanctions will result in a near complete shutdown of Iranian oil sales and an end of direct investment in Iran. Trump is on the path to regime change in Iran unless a new agreement is reached that is much stronger from the U.S. perspective than the JCPOA.

Here’s where the China and Iran stories converge. Iran has one and only one lifeline to keep its economy going — oil sales to China. And China desperately needs the Iranian oil to keep its own economy growing so it can pay or roll over its debts. The chart below tells the story:

Iran’s oil sales to South Korea, Italy, Japan, the UAE, Spain, France and Greece are likely to be shut down or greatly curtailed by the new Trump sanctions. That leaves China, India and Turkey as Iran’s only large customers. Turkey and India are facing financial crises of their own and may not have the hard currency to pay Iran. That leaves China as Iran’s only source of hard currency going forward.

China will not stop buying Iranian oil; they need the oil desperately. Iran will not stop selling oil to China; they need the hard currency desperately. Still, Trump’s sanctions will force China and Iran into financial and logistical gymnastics to avoid interdiction by Trump.

Iran will use its own tanker fleet to ship the oil because third-party countries won’t allow their tankers to violate the sanctions. China will have to cheat on SWIFT message traffic notices to avoid appearing to credit Iran with hard currency.

Even with these workaround methods in place, the two-way flow of oil and currency will become more difficult. The impact on China and Iran will be to slow both economies even if the oil and currency keep flowing.

China is between a rock and a hard place because it’s trying to control the increase in debt while trying to borrow more and pay its debts at the same time. Iran is in even worse condition because its foreign investment currency lifelines are being cut one by one even as the government struggles with hyperinflation, bank runs and social unrest.

Both of these situations could be alleviated if China would give Trump the trade deal he wants and if Iran would give Trump the nuclear deal he wants. Both outcomes are unlikely in the near term because of the confrontational geopolitics standing in the way.

Markets have been notably docile lately despite crises in Argentina, Turkey, Indonesia, Iran, China, Venezuela and elsewhere. Political crises related to Brexit and U.S. political dysfunction have not roiled global markets so far. The calm and low volatility are about to end.

The China-Iran nexus in confrontation with the U.S. is the last straw.

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In David Kostin’s latest note to clients, the Goldman strategist warned that market complacency over escalating US trade war with China may have gone too far, and warned that rising tariffs represent a growing threat to corporate earnings through higher costs and lower margins.

Coming on the same day that JPMorgan revised its “new baseline“, turning increasingly bearish and now predicting that the US will impose 25% tariffs on all Chinese imports in the near future, Kostin similarly warned that a 25% tariff on imports from China could erase earnings growth for S&P 500 companies in 2019.

Goldman also explained that the way higher tariffs would be transmitted to corporations was by a reduction in corporate earnings through higher costs and lower margins. He calculated that roughly 15% of cost of goods sold (COGS) is imported. And given S&P 500 constituent firms are more global in nature and have more complex supply chains than overall industry, Goldman estimated that imports account for roughly 30% of S&P 500 COGS. This estimate is consistent with the 30% share of S&P 500 sales generated outside the US (imports from China account for 18% of total US imports).

What this means according to Goldman is that as the boost from tax reform fades some time over the next 2 quarters, pressure on corporate margins is about to ratchet up and most companies will suffer margin erosion as trade war ramps up. Meanwhile, firms with the ability to maintain or expand profit margins will become increasingly scarce and will likely be rewarded by investors. In other words, companies with a high pricing power are well-positioned to pass through input cost pressure to consumers, preserving high margins. Kostin explains:

The market typically rewards companies with high margins when the outlook for corporate profitability worsens. This pattern occurred in 2017, when high-margin stocks outperformed throughout most of the year as the labor market tightened and commodity costs rose. However, as investors embraced the likelihood of tax reform in late 2017, that scarcity premium evaporated and low-margin stocks rebounded, but that recent outperformance seems unlikely to last.

This relative outperformance of high margin companies is shown in the chart below.

How to uncover these “trade war” diamonds in the rough? According to Goldman, one way to identify firms with a high likelihood of maintaining margins going forward is to look for demonstrated records of margin strength. High and stable gross margins are typically an indicator of high pricing power.

Kostin analyzed companies based on the average level and standard deviation of gross margins during the past five years. By these measures, firms in industries at the bottom right of the chart below would be best-positioned to withstand rising input costs and other margin pressures, such as companies in Software & Services.

At the same time, some industries with histories of strong gross margins have seen their competitive positioning weaken in recent years. The Household and Personal Products industry group, for example, has historically enjoyed among the highest and most stable gross margins across the Russell 1000. But during the last two years, the median stock in the industry group has experienced a gross margin decline of 75 bp. In contrast, Software & Services has high and stable gross margins and has seen margins expand by 56 bp during the past two years

To make life easier for investors who are worried about the market impact from the next trade war, Goldman has compiled a list of 33 companies with gross margins that are high and stable, and which have outperformed a group of firms with weak and variable gross margins by more than 18 pp YTD (+12% vs. -6%).

Firms on the list comprise Russell 1000 stocks ranking in top quintile of their sector based on the level and stability of gross margins during the past five years. According to Goldman, the stocks have all also experienced steady or expanding gross margins during the past one and two years. Firms in six different sectors are represented in the list. The 10 stocks meeting the screening criteria with the lowest coefficient of variation in gross margins: NATI, WAT, VMW, IDXX, XYL, AZO, FLO, SIRI, EXPE, and ADBE.

So for those who are convinced it is only a matter of time before the market turns, one pair trade idea would be to go long a basket, or all, of the names below, while shorting the broader market (although maybe excluding the FANGs which have been the backbone of the S&P’s ascent so far in 2018).

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Authored by Robert Bridge via The Strategic Culture Foundation,

With the termination of a YouTube account, or simple tweak of an algorithm, the tech company monsters – Google, Facebook, YouTube and Twitter – are able to deprive millions of Americans of conservative news sources, undermining both the Constitution and the spirit of democracy.

In a perfectly wired world, the gatekeepers of the Internet would limit themselves specifically to the technical aspects of their job, ensuring that a well-oiled matrix runs smoothly and effectively for the end user. But alas, we do not inhabit a perfect world.

Political bias runs far and deep inside of Silicon Valley, and following the defeat of Hillary Clinton in the 2016 presidential election, the tech giants are now poised to make life very difficult for conservatives. That much was plain to see in a shocking video of a Google meeting, chaired by the company’s founders Larry Page and Sergey Brin, just days after U.S. voters sent Donald Trump to the White House.

Brin kicked off the cry fest by stating, “Let’s face it, most people here are pretty upset and pretty sad because of the election…As an immigrant and a refugee I certainly find this election deeply offensive and I know many of you do too.”

What followed from there was one Google executive after another describing their disappointment with the election, some actually shedding tears, interspersed with bold promises to better “advocate for our values,” which is just another way of saying that Conservative values are worthless and the Democrats now have a moral duty to fulfill. 

Now had this been an Alcoholics Anonymous meeting, or a get together of Democratic political pollsters, such lamentations would have been understandable. But coming from Google, the world’s premier search engine of news and information, it was downright creepy.

There were already calls of despair coming from inside the Google fortress before this very cringe-worthy meeting. James Damore, an engineer at the tech company, made headlines with a 10-page memo he wrote entitled, “Google’s Ideological Echo Chamber,” which exposed the ‘discriminatory’ hiring practices Google allegedly endorses.

Damore, together with another former Google engineer, David Gudeman, followed up on the memo with a lawsuit that accused Google of cultivating a corporate culture that regularly admonishes “politically conservative white men”.

“Google’s management goes to extreme — and illegal — lengths to encourage hiring managers to take protected categories such as race and/or gender into consideration as determinative hiring factors, to the detriment of Caucasian and male employees and potential employees at Google,” the suit reads.

“Not only was the numerical presence of women celebrated at Google solely due to their gender, but the presence of Caucasians and males was mocked with ‘boos’ during company-wide weekly meetings.”

Perhaps most explosive, Damore and Gudeman’s lawsuit goes on to claim that the company maintains “blacklists,” which are allegedly designed to prevent employees with conservative views from obtaining promotions within Google, which also, incidentally, owns YouTube.

Earlier this month, Google, which came under attack by Donald Trump for “suppressing voices of Conservatives,” refused to attend a Senate Select Committee on Intelligence. This would have given lawmakers the chance to grill the company over claims of bias, which does seem to have a tendency to skew algorithms against white males.

To illustrate the point, as The Unz Review reported, I would encourage the reader to perform a quick Google search for ‘American inventors’ and see where famous white innovators rank in Google’s world.  Of the top ten names on the list, only Thomas Edison represents the white Caucasian males, the other nine are African Americans. Clearly, something is very wrong with that picture.

While the black community certainly had their share of innovators, how is it remotely conceivable that the Wright Brothers, Henry Ford, Albert Einstein, Nikola Tesla, Bill Gates and Steve Jobs – and so many other creative white guys – fail to rank not just in the top ten, but in the top twenty?  

What seems to be happening is that the aversion to the “white male conservatives” that Damore and Gudeman spoke of inside of Google is starting to radically impact search results, gradually denying white males their proper place in the history books. This is nothing less than the deliberate rewriting of history. Personally speaking, these efforts must be challenged before it gets completely out of control and reality is turned on its head by a ‘private company’ with a noxious, biased and prejudiced worldview.

In any case, it seems James Damore became an inspiration to other right-leaning (or simply ‘freedom leaning’) Silicon Valley employees, and not just those getting bean bag chairs, neck massages and free lunches while they sell out white male Conservatives down the river on Google’s sprawling campus. Last month, Brian Amerige, a senior Facebook engineer, disseminated on Facebook’s internal message board a memo entitled,“We Have a Problem With Political Diversity,” which was obtained by The New York Times.

“We are a political monoculture that’s intolerant of different views,” Amerige proclaimed. “We claim to welcome all perspectives, but are quick to attack – often in mobs – anyone who presents a view that appears to be in opposition to left-leaning ideology.”

Since news of the letter went viral, more than 100 Facebook employees joined Amerige in a call for more diversity inside of the social media titan. However, that is a tiny fraction of the company’s some 25,000 employees, which don’t seem ready to declare mutiny against its founder and chief executive, Mark Zuckerberg. Indeed, just after publication of the memo, Alex Jones, founder of InfoWars, was banned from Facebook, Youtube and Twitter, as the internet inquisition against conservative voices ratcheted up, and just as the momentous midterm elections approaching fast.

Speaking of Twitter, last month its Jack Dorsey admitted the company has a problem when it comes to making sure its politics, which are left-leaning, do not manipulate profiles.

“I mean, we have a lot of conservative-leaning folks in the company as well, and to be honest, they don’t feel safe to express their opinions at the company,” Dorsey told Recode in an interview.

“They do feel silenced by just the general swirl of what they perceive to be the broader percentage of leanings within the company, and I don’t think that’s fair or right.”

But it’s not just Twitter employees who are feeling silenced.

This month, actor James Woods, who has over 1 million followers on Twitter, was locked out of his Twitter account over a humorous meme he sent out months ago that the social media company said “has the potential to be misleading in a way that could impact an election.”

In an interview with The Associated Press, Woods said he was told he’d be allowed back on Twitter only if he deletes the tweet. Woods said he would not comply.

“Free speech is free speech — it’s not Jack Dorsey’s version of free speech,” the actor said.

Given this oppressive, anti-conservative mindset that now dominates the major tech firms – which only appears in rare and very brave manifestations of employees risking their jobs and reputations to get the truth out, or from conservative voices getting censored – the need for some sort of ‘Internet Constitution’, which promotes the rights of every man, woman and child to express themselves as they feel appropriate, seems to be the only answer.

In the meantime, we can be sure that the grand myth being peddled by our politicians and tech firm CEOs about how the Russians are destroying our democratic institutions will only get louder. 

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Though US media has largely ignored the trend, military tensions between Washington and Beijing have continued to escalate in 2018, aggravated by the US’s trade-war push, the US’s insistence on selling arms to an increasingly emboldened Taiwan, US sanctions against a Chinese military unit and the ever-more-frequent “freedom of navigation” operations in the South China Sea, which China views as a challenge to its “indisputable sovereignty” over the South China Sea. Just yesterday, the guided-missile bearing USS Decatur, a Navy warship, sailed within 12 miles of two Chinese military outposts situated on the parts of the disputed Spratly Islands, elicited nothing but a discomforting silence from Beijing. One week earlier, China accused the US of staging a “provocative” flight of B-52 bombers over the South China Sea, which also served to heighten tensions.

And with what appears to be China’s response to these latest transgressions, Chinese officials have canceled a security meeting with US Secretary of Defense Jim Mattis which had been planned for October, the New York Times reported, citing an anonymous senior US official. The cancellations comes just days after a top Chinese official said there was no reason to panic over tensions between the world’s two largest economies. According to the NYT, the Chinese government told US officials on Friday, just before the beginning of China’s Golden Week holiday, that the summit would not happen.

China told the Trump administration on Friday that a senior Chinese military official would not be meeting Mr. Mattis, the American official said, who spoke on the condition of anonymity per diplomatic norm.

At last year’s security and diplomatic dialogue, the chief of the People’s Liberation Army, Gen. Fang Fenghui, attended the sessions held in Washington. (General Fang was purged shortly afterward, for unrelated reasons.)

Whether the accumulation of last week’s episodes, or one in particular, provoked the decision to scuttle the dialogue is not clear, the American official said.

While the announcement came out of the blue, in some respects, Beijing’s decision to cancel the talks wasn’t a surprise.

In some respects, Beijing’s move to abandon the dialogue, at least for the moment, was not surprising. The Foreign Ministry signaled last week that the arms sale to Taiwan threatened to cause “severe damage” to relations with the United States, including “bilateral cooperation in major fields.”

Aside from Sunday’s freeop, China was incensed by US Ambassador Terry Brandstad’s decision to take out an advertisement in the Des Moines Register to push back against claims that the Chinese government made in that newspaper, which it hoped would anger Iowan farmers, a key part of Trump’s base, by pointing out how his trade war would negatively impact them.

Last Tuesday, China refused a request by an American warship to make a port visit to Hong Kong in October.

China began a weeklong holiday Sunday. Government officials were not available for comment on the cancellation of the meeting.

On another front that could add to the sour feelings, the United States Ambassador in Beijing published a strongly worded opinion article on Sunday in his hometown newspaper, the Des Moines Register.

The opinion piece, a reply to a four-page advertorial paid for in the Register by the Chinese government last weekend, accused China of bullying and of unfair trade practices. It also complained about China’s state-controlled press.

Last year’s security meeting in Washington was relatively productive (though the official who represented China was later purged), according to the NYT.

At last year’s security and diplomatic dialogue, the chief of the People’s Liberation Army, Gen. Fang Fenghui, attended the sessions held in Washington. (General Fang was purged shortly afterward, for unrelated reasons.)

To be sure, this isn’t the only sign that the US and China are settling “into a newly chilly relationship.” Trump recently accused China of meddling in US elections, while Vice President Mike Pence is expected to lay out the US’s “negative views of China’s international behavior” in a “major speech” later this week.

Tensions between the US and China are manifesting elsewhere. One bellweather that reflects trade and military tensions with China is the US relationship with North Korea, which took yet another turn toward the chilly over the weekend as North Korea’s foreign minister denounced the US for “deepening the mistrust” between the two sides.

With this in mind, we’d like to once again bring up this handy chart, which should serve as a reminder: Currency and trade wars have a well-established history of preceding hot wars. Investors who are making long-term allocations would do well to remember that.

 

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Authored by Michael Pento via PentoPort.com,

Investors are experiencing huge moves in commodities, currencies, equities and in sovereign debt across the globe. And now the fall has arrived. Expect the volatility currently witnessed in markets to only surge.

This is because global central banks have overwhelmingly turned hawkish in a vain attempt to gradually let the air out of the massive bubbles they have spent the last decade recreating. Unfortunately, that is not the nature of asset bubbles—they don’t end with a whimper–and they are about to burst in violent fashion.

First off, our central bank hiked rates for the 8th time since December 2015 at the September FOMC meeting. While the Fed did remove the word accommodative from its policy statement, it also raised the neutral rate to 3%, from 2.9% on the Fed Funds Rate. And, most importantly, predicted it would stay above that neutral rate for two years—keeping it at the 3.4% level. It also indicated that December would be the next rate hike and that three more hikes are on the agenda for 2019.

Nevertheless, the Fed is now caught in a hydraulic press of its own making; and is completely unaware of the predicament it is in. An inflation rate of 2% has been its goal for the past decade. And now inflation, when measured by core CPI, is up 2.2% y/y and is up 2.7% y/y on the headline rate. Even though the Fed emphasizes the Personal Consumption Expenditure inflation rate rather than Consumer Price Inflation, it is still aware that inflation is rising above its target.

Therefore, its own inflation models – however irrelevant and useless they may be – are compelling the Fed to keep on raising rates. But because inflation is a lagging indicator, the Fed will keep on hiking rates until the next economic downturn is well underway. However, since asset bubbles and debt levels have never been more disconnected from reality, the next economic downturn should quickly morph into a depression rather than just a normal recession.

The sad truth is that the global economy has become so unstable due to a humongous level of debt (up over 40% since 2008) that there is no R*, or neutral rate for the Fed to reach. One of the fatuous goals of central banks is to place interest rates at a level that is neither stimulative to inflation or a depressant to job growth—the real interest rate where the economy is at an equilibrium. The only problem with this exercise is that the Fed has no idea what level this R* rate should be. Only a free-floating and market-based interest rate can accomplish this task. For a central bank to usurp this process is both futile and dangerous.

But the Fed has already hiked to the point in which the global economy has started to falter. The discrepancy between U.S. interest rates and those of foreign markets has put upward pressure on the dollar and is putting debt service payments on the $11 trillion of dollar-based foreign loans under extreme pressure.

The current chaos in Emerging Markets would have started years ago if it were not for the Bank of Japan and the European Central bank’s massive ventures into money printing. The Fed’s ending of QE back in October of 2014 was merely offset by those other central banks’ purchases. Thus, delaying the deflationary impact of reverse QE.

However, the pace of global QE is crashing from a peak of $180 billion per month during 2017, to $0 by the end of this year. Also, 14 of the most important global central banks are in a rate hiking mode, while only 5 currently hold a dovish monetary policy stance. This means the gargantuan pile of $250 trillion worth of global debt, which is up $70 trillion since 2007, along with the surging level of annual deficits, to a great degree must now stand on its own. In other words, the private sector must step in to supplant government purchases or interest rates will simply skyrocket.

The amount of Publicly Traded Debt in the U.S. at the start of the Great Recession in December 2007 was $5.1 trillion dollars; and the Fed’s balance sheet totaled around $800 billion. That amount of Treasury issuance has now surged to $15.8 trillion today (not counting intra-governmental debt). And yet, the Fed’s balance sheet now totals $4.2 trillion. Therefore, that $4.2 trillion worth of Fed assets—an increase of $3.4 trillion–is trying to support nearly $16 trillion of publicly traded debt–an increase of 10.7 trillion!

Not only this, but the fed is no longer buying any of our deficits, which have surged 33% y/y. And in fiscal 2019 (starting this October) will total well over $1 trillion per year. Indeed, rather than buying all of the annual deficits, as it did during the QE periods, the Fed is adding to the deficit by selling $600 billion of debt per year as part of its reverse QE process. When you add $50 billion per month of QT to the four rates hikes per annum you end up with an extremely hawkish Federal Reserve.

Meanwhile, central banks will keep on hiking rates until asset prices and economic growth come crashing down around the globe.

The truth is the global economy has become one giant central bank shell game; consisting of perpetually rising asset prices that have been supported by consistently falling interest rates. Interest rates that hover around zero percent have become mandatory to support surging debt loads. Now that QE is ending and interest rates are rising, the whole artificial construct has started to implode.

It is now very likely that the NYSE will suffer through one or more of what is known as circuit breaker days. The NYSE rule 80B, stipulates that there will be a 15 minute pause if the market falls by 7%. It will then reopen until the market drops by a total of 13%; in that case it will shut down for another 15 minutes. And then, if the market drops by a total of 20% intraday, it will close for the remainder of that day.

With trillions of investment dollars being moved from the active management style of investing to the passive and indexed ETF variety over the past few years, there is virtually nothing to offset the avalanche of sell orders and plunging stock prices once the panic begins. Time is running out to garner an active strategy that hedges your investments and seeks to protect your wealth from the coming deflationary wipeout.

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The Senate will vote this week on Brett Kavanaugh’s Supreme Court nomination, Majority Leader Mitch McConnell said Monday.

“Let me make it very clear. The time for endless delay and obstruction has come to a close. Judge Kavanaugh’s nomination is out of committee. We’re considering it here on the floor,” McConnell said. “We’ll be voting this week.”

The Senate will first need to vote to cut off debate on the nomination before reaching a final confirmation vote. According to The Hill, if McConnell waited until Friday to file cloture on Kavanaugh’s nomination that would set up an initial vote on ending debate as early as Sunday. If McConnell filed cloture before that, he could bring up the vote as soon as the Friday deadline passed or when the FBI wrapped up its investigation.

McConnell said Kavanaugh was “rightfully angry” after Thursday’s raucous Judiciary Committee hearing. The nominee forcefully and tearfully denied the assault allegation by Christine Blasey Ford, who testified earlier in the day, and separate claims by two other women who weren’t called to testify.

The Senator’s comments, made during a Senate floor speech, come as the FBI is rushing to wrap up its investigation into multiple sexual misconduct allegations against Kavanaugh by Friday. GOP senators and aides have been careful not to pin down a specific timeline on Kavanaugh’s nomination, arguing that the FBI could wrap up its work before the Friday deadline.

McConnell’s pledge that the Senate will vote on Kavanaugh’s nomination comes as Trump’s nominee remains short of the simple majority needed to be confirmed. Republicans hold a narrow 51-49 majority meaning they can lose one GOP senator before they need help from Democrats to confirm Kavanaugh. No Democrats have said, yet, that they will support him.

GOP senators Susan Collins and Lisa Murkowski remain undecided on Kavanaugh’s nomination. Sen. Jeff Flake said last week that he would support Kavanaugh, but he was key to getting the one-week investigation into the allegations against Kavanaugh.

Over the weekend, Flake said that he expected to support Kavanaugh unless the FBI finds something in its investigation.

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As we slip deeper into the euphoria of what is now the longest bull market on record, resulting in a deluge of corporate “zombies” , the initial public offering market is similarly slipping into a noxious trance of its own, welcoming to U.S. exchanges record numbers of companies that lose money. According to a new report by the Wall Street Journal, a record number, or 83% of US listed IPOs over the first three quarters of 2018, were companies that lost money in the 12 month prior to their going public.

According to the WSJ, this is the highest proportion on record dating back to 1980.

Not only that, but investors who have been buying these money-losing companies have been rewarded. Stocks of companies that lose money and list in the United States this year are up an average of 36% from their IPO price. This actually outperformed the return for IPO stocks that are posting positive earnings, which came in at 32%. Both beat the S&P 500, which has returned 9% over the same course of time.

And because it’s this easy to conjure money out of thin air, new listings have surged. During the first three quarters of 2018, $50 billion in IPO money has been raised by more than 180 companies. This puts this year on track to be the busiest year for IPOs since 2014.

A great example is the SurveyMonkey IPO, which was up more than 40% last week, despite the fact that it hasn’t ever posted a profitable year and lost $24 million in 2017. The often discussed pot stock Tilray is another such example: after listing in the United States over the summer, shares are up more than 740% in the midst of a larger boom around marijuana stocks.

Or, take for example Solid Biosciences, which not only has never generated earnings – but has never generated revenue – and disclosed to the market that one of its clinical trials was put on hold before its IPO in January. This was rewarded by the company raising $144 million and its stock almost tripling.

Part of the demand for IPOs likely comes from the fact that bigger name private companies, like Uber, have decided to stay private longer than companies at their stage have traditionally done (we reported on Uber’s most recent $312 million quarterly loss in May). 

Such levels of non-profitable IPOs were only been one time before: during the peak of the dot com bubble. Back in 2000, 81% of companies going public were unprofitable. This number is now 83%. In addition to technology companies, many biotech companies – often money losing entities while they prepare for, and execute, clinical trials – have helped push this number higher.

But this hasn’t stopped investors from comparing the current environment to the dot com bubble. In 2000, 14% of tech companies that listed were profitable. This compares to 19% so far this year. Of course, the dot com bubble watched many of its once-darling companies go bust and file for bankruptcy. During the next recession, history will once again repeat itself. 

Kevin Landis, chief investment officer of technology-focused Firsthand Capital Management, had one message for the Wall Street Journal:

“The lesson from 2000 is don’t chase what everyone else is chasing.” 

And yet that’s precisely what everyone is doing.

Of course, not every single IPO has done exceptionally well this year. ADT fell 12% on its first day of trading and shares in the company are down more than 30% since its IPO, which priced at the low-end of its initial target range earlier this year. Snapchat is also a great example. The stock is down almost 50% from its IPO price.

For the most part, however, companies can get away with the narrative that they will eventually be profitable and that investors’ patience may be rewarded for investing at these early stages. However, if the broader market slips into recession, or if the panic buying slows just a little – or god forbid, turns into panic selling – a stark reality check could be in the cards for those believing there’s money to be made from companies where there is actually no money being made.

The biggest risk was summarized by University of Florida finance professor Jay Ritter: “The problem with young growth companies where investors have built in really optimistic assumptions is if the company doesn’t deliver, it can get revalued in a heartbeat.”

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Drone footage and shocking photos have emerged in the aftermath of the devastating 7.5 magnitude earthquake which struck the Indonesian island of Sulawesi, unleashing a 20-foot tsunami that has resulted in 1200 deaths and a brewing humanitarian crisis. 

The tsunami was triggered by a 7.5 magnitude earthquake that struck along the coastal district of Donggala on Friday. Most of the dead were found in nearby Palu, a city of nearly 300,000 where an onlooker took a video of the seawater raging ashore just after 5 p.m., local time. –NPR

Local authorities, overwhelmed by the sheer number of bodies, have arranged for a mass burial site for he victims, according to Indonesian disaster agency spokesman Sutopo Purwo Nugroho. 

President Joko Widodo visited Palu on Sunday, inspecting the large-scale damage and consoling survivors. He also acknowledged problems with getting aid to the region and urged people to be patient.

Thousands of people began camping at the airport over the weekend, hoping to leave. But the airport has been operating at partial capacity since it reopened. And as they wait for a chance to fly out, people are also enduring heat of more the 90 degrees, with little to sustain them. –NPR

Releif agencies say that in addition to travel and communication issues, the response is limited by the fact that many staff members are currently deployed to Lombok – an island hundreds of miles to the south, where a 6.9 magnitude earthquake struck last month. 

Widespread damage caused by #PaluTsunami and captured by @planetlabs satellites. Imagery is very fresh, less than 5 hours old when I downloaded it. #Palu #Tsunami pic.twitter.com/Ju4gLr53qN

— Murray Ford (@mfordNZ) September 29, 2018

“Food and clean water are in extremely low supply, and many people continue to loot the markets and other places in search of food,” said Radika Pinto, area manager for World Vision. “Access and security are making it challenging to start distributing relief supplies.”

Photos from the New York Times and others show extensive damage and desperate conditions; 

Detik-detik saat rumah-rumah bergerak dan roboh disebabkan proses likuifaksi dan amblesan akibat gempa 7,4 SR di Kota Palu. Permukaan tanah bergerak dan ambles sehingga semua bangunan hancur. Proses geologi yang sangat mengerikan. Diperkirakan korban terjebak di daerah ini. pic.twitter.com/Vf5McUaaSG

— Sutopo Purwo Nugroho (@Sutopo_PN) September 30, 2018

 

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Authored by Tom Luongo,

“You know General, sometimes the men don’t know when you’re acting. It’s not important for them to know. It’s only important for me to know.”
— Patton

The more I observe Donald Trump the more I’m convinced he’s more bark than bite, that his instincts on foreign policy are correct but his method is mad.

I was on Radio Sputnik Moscow recently discussing Russian Foreign Minister Sergei Lavrov’s speech at the United Nations General Assembly.  They did a very nice write up of the interview which you can read/listen to here. 

And in that interview I touched on a number of things I’ve been writing about currently that I think are very important to remember as events spiral out of control.

President Trump’s and his top administration officials’ behavior in foreign circles have created a lot of chaos.  That’s not news.

And we know that chaos is part of Trump’s method.  He likes to stir the pot and get people, “on tilt.”

It helps him cut through the barriers people put up and get right to the heart of a matter.  It’s a style that is very unnerving and, I think, creates a lot of confusion not only on the part of who he’s negotiating with but also observers of his negotiations.

We never quite know where we stand with Trump.  And that’s exactly the way he likes it.

And the more he ratchets up pressure on those he’s negotiating with the harder it is for people with a conscience and a desire to see the violence in this world drop to watch it and not throw up our hands in disgust.

There is a tendency among libertarians to simply fall back on first principles and take the moral high ground when confronted with this type of situation.  I get it.  It’s easy.

I spent a few years being that guy.

Every once in a while I regress to that guy, especially when Trump does something monumentally stupid, which he has a few times so far as President.

But, that doesn’t mean that what has been is what will necessarily be.  One of the fallacies of modern political discourse is linear thinking.  Extrapolating short-term trends over the long-term holding all variables constant and coming to some inane and equally catastrophic conclusion.

If you want to know where global warming hysteria comes from, here’s your sign.

There is a willful ignorance in politics to view anything cyclically.  Cooler heads prevailing doesn’t get people angry enough to hit the ‘donate’ button on a candidate’s website.

And once you have people in a heightened state of fear it’s easy to keep them there.

The same thing goes in analyzing Trump’s behavior.  Just because he’s been full-throated in his support of Israel, for example, is not incontrovertible proof he’s simply another stooge for the evil Zionists in Tel Aviv.

Just because he’s ratcheting up Cold War tensions with Russia as part of his energy dominance policy does not mean he’s worse than Hillary Clinton would have been, since she was the architect of the current policy on Syria and would have never let Assad and Putin run the table like they have to this point, even if Trump has put up some opposition to it.

Trump is learning on the job. He will contradict himself.  He will change course without ever admitting a mistake.  That’s who he is.

He’s surrounded by people actively sabotaging him and who fundamentally disagree with his instincts for peace.

He’s got a hostile Congress, disobedient underlings, bureaucracies in full revolt, an open insurrection, and a media trying to portray all of it as so chaotic that we would all be better off if we just got rid of him.

That may sound like excuses to the overly-woke on the Right but it’s reality.

Trump isn’t Orange Jesus.

He’s a man with all of the faults, strengths and biases of any man.

That was the picture I was trying to paint to a Russia-sympathetic audience to help cut through the noise Trump creates.  I wanted to help them look at what who we are actually dealing with, not the public persona he puts on to confuse and infuriate people.

As I told Sputnik yesterday:

Donald Trump is a very interesting and mercurial figure, and I’m both happy and sad that he’s my president, because he’s like half good and half bad. I do believe that he feels that the current geopolitical world order that the US has been paying for since the end of World War 2, the post-WW2 institutional order, doesn’t work for the United States anymore.

But I also feel that at a certain level, he doesn’t quite understand that we also don’t have a manifest destiny to tell the world how it’s going to run, and how it’s going to operate, either. That’s a conflict between the practicalities of the real world, and I hate to use the term, but Donald Trump is the quintessential baby boomer in that respect. He really has that kind of messianic American exceptionalism burned into his psyche. And while it’s laudable at a certain level, it can also be really toxic if taken to an extreme.

So I really think that with his personality being the way it is, and his negotiating style, that some of what he’s being doing is real bluster, and some of it is real – his real honest anger.

Trump is angry that the America he adores is in the position that it’s in.  He’s furious at how poorly Washington operates.  He’s despises the globalists for having done this.

I don’t think he quite understands that Russia is his ally in this because, to him, America comes first and that means geostrategically opposing the growing alliance between Russia and China.

His frustration with the Obama administration et. al. creating that alliance in their incompetent implementation of the Brzezinski Doctrine to keep Central Asia weak and divided is immense.

But, as Baby Boomer he sees Israel as an indispensable part of the American empire, but up to a point.  And his proposal to Netanyahu this week of a ‘two-state solution’ was his way of reminding Bibi who wears the pants in this relationship.

Notice how Trump hasn’t said one word about the major provocation of Russia implementing a de facto ‘No-fly zone’ over Western Syria, Lebanon, Israel and the western Mediterranean.

That is yuuuge tell.  It tells me we are closer to a deal in the Middle East than things look.  Just like with North Korea.

But don’t think for a second Trump will blink on Iranian sanctions until the rest of the pieces fall into place.  It’s not his style.

He also has certain members of his cabinet to placate while he deals with his domestic troubles.

I believe the hardest part of analyzing the situation in the U.S. right now is grasping at the order of operations.  What problem needs to be solved first before the next one gets solved, etc. etc.

Trump is taking on everyone all at once.  It’s ambitious and bold, interesting and frustrating, for everyone. His foreign counterparts know the score by now.  I don’t worry for a second Putin and Xi Jinping right through Trump.  He doesn’t scare them.  But, he scares his domestic opposition to death because they can’t control him and that’s why they won’t stop until either the U.S. has been destroyed for all intents and purposes or he wins.

Those are not, unfortunately, mutually exclusive outcomes.

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