IMF Chief Warns Global Economy Faces New “Great Depression”
How’s this for some New Years optimism?
The new head of the IMF, who took over from Christine Lagarde in November, warned that the global economy could soon find itself mired in a great depression.
During a speech at the Peterson Institute, IMF Chairwoman Kristalina Georgieva compared the contemporary global to the “roaring 20s” of the 20th century, a decade of cultural and financial excess that culminated in the great market crash of 1929.
According to the Guardian, this research suggests that a similar trend is already under way, and though the collapse might not be around the corner, when it comes, it will be impossible to avoid.
While the inequality gap between countries has closed over the last two decades, the gap within most developed countries has widened, leaving millions more vulnerable to a global downturn than they otherwise would have been.
In particular, she singled out the UK for criticism: “In the UK, for example, the top 10% now control nearly as much wealth as the bottom 50%. This situation is mirrored across much of the OECD (Organisation for Economic Co-operation and Development), where income and wealth inequality have reached, or are near, record highs.”
She also warned about the potential for climate change to become a bigger obstacle for humanity, while increased trade protectionism instills more volatility in markets.
She added: “In some ways, this troubling trend is reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.”
She warned that fresh issues such as the climate emergency and increased trade protectionism meant the next 10 years were likely to be characterised by social unrest and financial market volatility.
“If I had to identify a theme at the outset of the new decade, it would be increasing uncertainty,” she said.
Of course, the IMF isn’t the first institution to try and gird the global financial system against the affects of climate change. It also isn’t the first international institution to warn Britain about the possible economic fallout from Brexit.
Back in December, the Bank of England said it would set up “tough” climate stress tests for banks and insurers in the UK. The tests would involve three different scenarios stretching out over decades.
However, critics quickly pointed out that the tests would essentially be toothless. Regardless of whether institutions pass or fail, the results will initially only be published in aggregate without naming individual institutions, though the BoE hasn’t ruled out naming and shaming in the future.
While geopolitical tensions are back in the headlines thanks to Iran, Hong Kong, and a rash of protest movements around the world, few would argue that the bull market that dominated the last decade was in any way impacted by geopolitics. Instead, the market largely ignored geopolitical tensions, and allowed itself to be carried ever-higher by a flood of easy money from central banks.
This is further evidenced by the fact that, every time the Fed has tried to wean the American economy off of rock-bottom interest rates or the central bank’s ever-expanding balance sheet, markets have reacted with fury.
Having considered all of this, we’d like to present another scenario: if Trump loses in November, and the Fed regains the courage to raise interest rates now that President Trump isn’t around to publicly browbeat and humiliate them, that might be enough to send markets into a tailspin, even if the Dems take the ‘market friendly’ road and nominate Joe Biden.
Buy the dip has been an American tradition since 1987. The first truly modern global financial crisis unfolded in the autumn of that year. October 19, 1987, has become the day known infamously as “Black Monday. It set forth a chain reaction of market distress that sent global stock exchanges plummeting in a matter of hours. In the United States, the Dow Jones Industrial Average (DJIA) dropped 22.6 percent in a single trading session. This loss remains the largest one-day stock market decline in history and marks the sharpest market downturn in the United States since the Great Depression.
Leading up to this event the stock markets raced upward during the first half of 1987 gaining a whopping 44 percent in just seven months. This, of course, created concerns of an asset bubble, however, few market traders expected the market could unravel so viciously. Prior to US markets opening for trading on Monday morning, stock markets in and around Asia began plunging. In response investors rapidly began to liquidate positions, and the number of sell orders vastly outnumbered willing buyers near previous prices, creating a cascade in stock markets.
Thomas Thrall, a senior professional at the Federal Reserve Bank of Chicago, who was then a trader at the Chicago Mercantile Exchange later said, “It felt really scary, people started to understand the interconnectedness of markets around the globe.”
Without a doubt, several new developments in the market enlarged and exacerbated the losses on Black Monday. Things like international investors becoming more active in US markets and new products from US investment firms, known as “portfolio insurance” had become very popular. These included the use of options and derivatives. A number of structural flaws also fueled the losses. At the time of the crisis, stock, options, and futures markets used different timelines for the clearing and settlements of trades, creating the potential for negative trading account balances and forced liquidations.
That is when, Alan Greenspan, then Federal Reserve chairman, came forward on October 20, 1987, with a statement that would shape traders’ actions for decades. Fed Chairman Alan Greenspan said, “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system” Prior to this markets were seen as a much riskier venture. The great legacy from the events taking place in 1987 is rooted in the actions and swift response of the Fed, that the central bank would backstop markets. This premise has grown over time.
After Black Monday, regulators overhauled trade-clearing protocols and developed new rules. One of the most important is known as circuit breakers which allow exchanges to halt trading temporarily in instances of exceptionally large price declines. Under these rules, the New York Stock Exchange will temporarily halt trading when the S&P 500 stock index declines 7 percent, 13 percent, and 20 percent. This is done in order to provide investors time to make better informed decisions during periods of high market volatility and reduce the chance of panic. Risk managers also re-calibrated the way they valued options.
Unlike previous financial crises, the Black Monday decline was not associated with a deposit run or any other problem in the banking sector. Still, it was very important because the Fed’s response set a precedent that has over time when coupled with other events massively increased the moral hazard associated with intervention in free markets. Following the rout stock markets quickly recovered a majority of their Black Monday losses. In just two trading sessions, the DJIA gained back 57 percent, of the Black Monday downturn. Because of the Fed action in less than two years, the US stock markets surpassed their pre-crash highs and was not followed by an economic recession.
And now for the grand point of this post, we should not underestimate how the Fed’s response to Black Monday ushered in a new era of investor confidence in the central bank’s ability to control market downturns. The actions by Fed Chairman Greenspan galvanized the mantras “buy the dip” and “don’t fight the Fed” and powered them to the top of trading lexicons. It has also been a key factor in allowing the stock market to morph into a much larger symbol of the economy than it merits. This is reflected in how over the decades growth in the financial sector has soared dwarfing that in the real economy.
Another often overlooked issue is how changes in tax laws over the years have moved more wealth into stocks. These include the often forgotten and seldom mentioned changes many made by the Bush administration following the dotcom bust and 9-11. These factors and money constantly funneled into markets by pension funds and such coupled with soaring central bank liquidity has levitated markets to record high, after record high, despite stagnant fundamentals. It seems the “fear of missing out” and exuberance has caused many investors to become blind to the idea that years of profits can vanish in a blink of the eye.
This should force us to question the utter madness displayed in the widening disconnect between current valuations and underlying fundamentals. It could be argued that because of these actions QE has amplified speculation as investors seeking yield now feel almost invulnerable to future losses. We can cast away all the terms and warnings about “moral hazards” and “slippery slopes,” however that does not guarantee they will not return to haunt us. Historically our hubris and arrogance has shined as a beacon illuminating the fact that every time those in high finance declare it is different this time they have been proven wrong.
Not Just Hunter: Widespread Biden Family Profiteering Exposed
Clinton Cash author Peter Schweizer is out with a new book, “Profiles in Corruption: Abuse of Power by America’s Progressive Elite,” in which he reveals that five members of the Biden family, including Hunter, got rich using former Vice President Joe Biden’s “largesse, favorable access and powerful position.”
Frank Biden, Vice President Joe Biden, & Mindy Ward
While we know of Hunter’s profitable exploits in Ukraine and China – largely in part thanks to Schweizer, Joe’s brothers James and Frank, his sister Valerie, and his son-in-law Howard all used the former VP’s status to enrich themselves.
Of course, Biden in 2019 said “I never talked with my son or my brother or anyone else — even distant family — about their business interests. Period.”
As Schweizer puts writes in the New York Post; “we shall see.”
James Biden: Joe’s younger brother James has been deeply involved in the lawmaker’s rise since the early days – serving as his the finance chair of his 1972 Senate campaign. And when Joe became VP, James was a frequent guest at the White House – scoring invites to important state functions which often “dovetailed with his overseas business dealings,” writes Schweizer.
Consider the case of HillStone International, a subsidiary of the huge construction management firm, Hill International. The president of HillStone International was Kevin Justice, who grew up in Delaware and was a longtime Biden family friend. On November 4, 2010, according to White House visitors’ logs, Justice visited the White House and met with Biden adviser Michele Smith in the Office of the Vice President.
Less than three weeks later, HillStone announced that James Biden would be joining the firm as an executive vice president. James appeared to have little or no background in housing construction, but that did not seem to matter to HillStone. His bio on the company’s website noted his “40 years of experience dealing with principals in business, political, legal and financial circles across the nation and internationally…”
James Biden was joining HillStone just as the firm was starting negotiations to win a massive contract in war-torn Iraq. Six months later, the firm announced a contract to build 100,000 homes. It was part of a $35 billion, 500,000-unit project deal won by TRAC Development, a South Korean company. HillStone also received a $22 million U.S. federal government contract to manage a construction project for the State Department. –Peter Schweizer, via NY Post
According to Fox Business‘s Charlie Gasparino in 2012, HillStone’s Iraq project was expected to “generate $1.5 billion in revenues over the next three years,” more than tripling their revenue. According to the report, James Biden split roughly $735 million with a group of minority partners.
David Richter – the son of HillStone’s parent company’s founder – allegedly told investors at a private meeting; it really helps to have “the brother of the vice president as a partner.”
Unfortunately for James, HillStone had to back out of the major contract in 2013 over a series of problems, including a lack of experience – but the company maintained “significant contract work in the embattled country” of Iraq, including a six-year contract with the US Army Corps of Engineers.
In the ensuing years, James Biden profited off of Hill’s lucrative contracts for dozens of projects in the US, Puerto Rico, Mozambique and elsewhere.
Frank Biden, another one of Joe’s brothers (who said the Pennsylvania Bidens voted for Trump over Hillary), profited handsomely on real estate, casinos, and solar power projects after Joe was picked as Obma’s point man in Latin America and the Caribbean.
Months after Joe visited Costa Rica, Frank partnered with developer Craig Williamson and the Guanacaste Country Club on a deal which appears to be ongoing.
In real terms, Frank’s dream was to build in the jungles of Costa Rica thousands of homes, a world-class golf course, casinos, and an anti-aging center. The Costa Rican government was eager to cooperate with the vice president’s brother.
As it happened, Joe Biden had been asked by President Obama to act as the Administration’s point man in Latin America and the Caribbean.
Frank’s vision for a country club in Costa Rica received support from the highest levels of the Costa Rican government— despite his lack of experience in building such developments. He met with the Costa Rican ministers of education and energy and environment, as well as the president of the country. –NY Post
And in 2016, the Costa Rican Ministry of Public Education inked a deal with Frank’s Company, Sun Fund Americas to install solar power facilities across the country – a project the Obama administration’s OPIC authorized $6.5 million in taxpayer funds to support.
This went hand-in-hand with a solar initiative Joe Biden announced two years earlier, in which “American taxpayer dollars were dedicated to facilitating deals that matched U.S. government financing with local energy projects in Caribbean countries, including Jamaica,” known as the Caribbean Energy Security Initiative (CESI).
Frank Biden’s Sun Fund Americas announced later that it had signed a power purchase agreement (PPA) to build a 20-megawatt solar facility in Jamaica.
Valerie Biden-Owens, Joe’s sister, has run all of her brother’s Senate campaigns – as well as his 1988 and 2008 presidential runs.
She was also a senior partner in political messaging firm Joe Slade White & Company, where she and Slade White were listed as the only two executives at the time.
According to Schweizer, “The firm received large fees from the Biden campaigns that Valerie was running. Two and a half million dollars in consulting fees flowed to her firm from Citizens for Biden and Biden For President Inc. during the 2008 presidential bid alone.”
Dr. Howard Krein – Joe Biden’s son-in-law, is the chief medical officer of StartUp Health – a medical investment consultancy that was barely up and running when, in June 2011, two of the company’s execs met with Joe Biden and former President Obama in the Oval Office.
The next day, the company was included in a prestigious health care tech conference run by the Department of Health and Human Services (HHS) – while StartUp Health executives became regular White House visitors between 2011 and 2015.
StartUp Health offers to provide new companies technical and relationship advice in exchange for a stake in the business. Demonstrating and highlighting the fact that you can score a meeting with the president of the United States certainly helps prove a strategic company asset: high-level contacts. –NY Post
Speaking of his homie hookup, Krein described how his company gained access to the highest levels of power in D.C.:
“I happened to be talking to my father-in-law that day and I mentioned Steve and Unity were down there [in Washington, D.C.],” recalled Howard Krein. “He knew about StartUp Health and was a big fan of it. He asked for Steve’s number and said, ‘I have to get them up here to talk with Barack.’ The Secret Service came and got Steve and Unity and brought them to the Oval Office.”
And then, of course, there’s Hunter Biden – who was paid millions of dollars to sit on the board of Ukrainian energy giant Burisma while his father was Obama’s point man in the country.
But it goes far beyond that for the young crack enthusiast.
With the election of his father as vice president, Hunter Biden launched businesses fused to his father’s power that led him to lucrative deals with a rogue’s gallery of governments and oligarchs around the world. Sometimes he would hitch a prominent ride with his father aboard Air Force Two to visit a country where he was courting business. Other times, the deals would be done more discreetly. Always they involved foreign entities that appeared to be seeking something from his father.
There was, for example, Hunter’s involvement with an entity called Burnham Financial Group, where his business partner Devon Archer — who’d been at Yale with Hunter — sat on the board of directors. Burnham became the vehicle for a number of murky deals abroad, involving connected oligarchs in Kazakhstan and state-owned businesses in China.
But one of the most troubling Burnham ventures was here in the United States, in which Burnham became the center of a federal investigation involving a $60 million fraud scheme against one of the poorest Indian tribes in America, the Oglala Sioux.
Devon Archer was arrested in New York in May 2016 and charged with “orchestrating a scheme to defraud investors and a Native American tribal entity of tens of millions of dollars.” Other victims of the fraud included several public and union pension plans. Although Hunter Biden was not charged in the case, his fingerprints were all over Burnham. The “legitimacy” that his name and political status as the vice president’s son lent to the plan was brought up repeatedly in the trial. –NY Post
US Forces In Tense Showdown With Russian Convoy On Blocked Syrian Highway
An extremely dangerous and rare incident played out in northeast Syria between the conflict’s two most powerful rival forces on Saturday when opposing American and Russian military convoys encountered each other on a highway.
The incident was filmed and published online by anti-Assad opposition group Syrian Observatory for Human Rights (SOHR), which described a major traffic jam outside the city of Al-Malikiyah, an oil-producing area of the country which has been occupied by American troops.
SOHR said the busy highway was halted“after US forces prevented a Russian patrol from continuing its way to countryside of Al-Malikiyah city.”
Though not precisely clear which convoy was the aggressor side from the video — or which caused the blockage — needless to say it was a tense and potentially explosive encounter given Moscow sees US presence in Syria as illegal and as an act of military aggression, while Washington in turn sees Russian troops as enemies bolstering Assad and Iran in the Middle East.
Other regional outlets, for example in Turkish media, also blamed the US side for maneuvering to block the Russian troops’ advance. Anadolu reports the Russian patrol was blocked from going near a key oil field in the area:
According to information Anadolu Agency obtained from reliable local sources, U.S. soldiers blocked a Russian military patrol en route to the oil field.
Tension occurred between the two groups, when U.S. soldiers asked Russian soldiers to return to the Amuda district in the northwest of Hasakah.
Russian soldiers had to return to where they came from as their way to Rumeylan, where the U.S. airbase is located, was blocked.
Russian patrols have reportedly stepped up operations in sensitive areas with US troops still stationed nearby, specifically in places like the region’s Rumeilan oil field, in Syria’s far northeast near the Iraq border.
Imagine how close this was to an international incident btwn nuclear armed great powers involving uniformed soldiers coming home in body bags.
This is NE Syria today. https://t.co/UQZFf3KaTw
Reporter for Voice of America news Mutlu Civiroglu noted Syrian Kurdish militia fighters intervened in order to ease tensions.
Meanwhile, Russia-based military analyst Mark Sleboda pointed out just how many things could have gone wrong in the tense encounter.
“Imagine how close this was to an international incident between nuclear armed great powers involving uniformed soldiers coming home in body bags,” he commented on Twitter.
Does a liquidity driven momentum market that seemingly does not care about valuations, risk, open gaps and technical extensions face any resistance at all? Are there technical limits for a market that goes up every day, every week and every month?
History teaches us that there are such limits and I’ll share a few charts to provide some context.
As it were this most recent OPEX week did what happens more often than not: Compress volatility further offering little to no 2 way price discovery exhibiting some of the most intra-day compressed price ranges ever:
As a result of the continuous one way action many individual stocks are not only historically valued, but also overbought.
These conditions have persisted for weeks, so little new on that front, but to give historic recognition its due a weekly chart of $AAPL showing a weekly 90 RSI has to be appreciated:
What’s the appropriate term here? Piling in? Buy till you die?
And yes I can’t resist but also show the same chart on a linear basis:
It is this point in time we get the FOMO treatment courtesy of Barron’s and Forbes:
Don’t be left behind, get on board. Reckless as far as I’m concerned, but nobody cares.
How do I know that nobody cares? Because demand for protection of any sort is scrapping at the bottom of the barrel.
See some of the put/call ratios:
Sometimes extreme complacency gets punished, sometimes it does not.
The faith in the Fed remains absolute, too strong is their influence on equity prices via their liquidity injections which do not appear to stop for months on end, so who’s to say when the dynamic shifts. Not until they withdraw liquidity is the conventional wisdom at the time.
Yes charts like $APPL leave little doubt that this market his very much overbought and reversion risk keeps increasing. Hence I maintain that the higher this market stretches without breathing the more dangerous it becomes.
So are there any signs of technical resistance?
Firstly recognize we have some of steepest and narrowest channels in history. One sizable down day or week and all of these patterns break to the downside with technical consequences:
$NYSE:
$NDX:
$NDX is of particular interest here as the furious rally has accomplished something very interesting on Friday:
$NDX futures tagged its 4 year trend line that has proven to be resistance time and time again. And $NDX has raced toward that trend line with a weekly RSI north of 81. Ironically an RSI not unlike the one seen in January 2018 when the index also tagged that very same trend line.
To expand on the historical rhyme $NDX components above their 200MA have reached 87 exceeding even the January 2018 level:
In 2017 readings of that magnitude did not mean the end of the bull run then, but these types of readings can clearly lead to trouble.
It is then the same measure for the 50MA that is of interest:
A negative divergence versus the year end highs in 2019. These divergences can persist, but are an early signal that something is amiss.
Another signal indicator, the $BPNDX also has reached a level historically consistent with coming reversals:
All of these speak of resistance reached on the internal front.
Indeed its the cumulative advance/decline index for the Nasdaq that sends that same message clearly:
Not only overbought, but divergent as well.
All of these readings and signals are coming in context of a yearly chart for $NDX that has precisely zero price precedence in being able to sustain such a vast extension without ending in tears:
But don’t be left behind. Just jump on board they say.
No, it’s not different this time. This cycle is exactly like the previous ones. And hence it’ll end the same way as the previous ones: With bears being mocked while bulls being reckless and greedy throwing all caution to the wind.
We may not know the outcome for a while, but in the here and now markets are approaching some notable points of resistance while demand for protection is at a historic low.
Don’t be left behind? Don’t be left holding the bag more likely.
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Dramatic Video Shows Turkish Coast Guard Deliberately Smashing Into Migrant Boat
After a week which tragically witnessed a sudden uptick in refugee and migrant incidents and drowning deaths in the Mediterranean, a dramatic video has been published online showing the Turkish Coast Guard resorting to extreme measures while intercepting migrant boats.
The video, which first appeared via a Middle East Telegram or other social media channel, shows a small crowded motor boat full of Syrian refugees being rammed by a much larger Turkish patrol boat.
The video appeared online and went viral on Sunday; however, it’s uncertain the precise date or location, but it likely took place in the Aegean Sea.
Women and children can be heard screaming in the video while trying to get away from the fast-approaching Turkish vessel, after which the larger coast guard boat rams into the migrants at high speed. It’s unclear the extent of injuries suffered by those in the packed boat, and no one appears armed or to have been acting aggressively.
Turkey’s coast guard has long been accused of taking harsh measures to prevent an estimated 60,000 to new refugees attempting to traverse the Mediterranean. It’s hardly the first time migrant and refugee boats have been rammed during the dangerous trip; however, past incidents have involved human-trafficking boats or piracy-related groups and not state actors like in this case.
Video leaked on social media shows a #Turkish coast guard boat ramming into a boat carrying #Syrian refugees in #AegeanSea preventing them from being trafficked into #Greece. Through this harsh measure, #Turkish Coast Guard prevented 60,000 Syrian refugees to go to #EU in 2019. pic.twitter.com/u2xFXr77yE
Meanwhile, Europe has documented a significant rise in migrants attempting to enter the EU via the eastern Mediterranean throughout 2019:
More than 82,000 migrants attempted to enter the EU from the eastern Mediterranean route in 2019, driven by the situation in Syria, and instability in Afghanistan, the Frontex Executive Director Fabrice Leggeri said in Brussels.
In 2018, 55,900 unauthorised entries were detected from the same route, while three years ago, at the height of the migrant crisis, there were 885,386.
Source: Frontnex/Flourish data via EuroNews.
This after the peak of the migrant crisis in 2015 and 2016. Turkey’s President Erdogan has recently warned a flood of refugees could impact Greece and other EU states if more is not done to help Turkey stave off the crisis, even lately voicing it as a “threat” if the EU doesn’t support Ankara’s Syria plans.
Many are predicting 2020 could mark a return to the worst of the past five year crisis, given the ongoing Turkish military incursion in northern Syria and a resumed Russia-Syria military offensive against jihadist militants in Idlib province.
In last week’s missive, I discussed a couple of charts which suggested the markets are pushing limits which have previously resulted in fairly brutal reversions. This week, the market pushed those deviations even further as the S&P 500 has now pushed into 3-standard deviation territory above the 200-WEEK moving average.
There have only been a few points over the last 25-years where such deviations from the long-term mean were prevalent. In every case, the extensions were met by a decline, sometimes mild, sometimes much more extreme.
The defining difference between whether those declines were mild, or more extreme, was dependent on the trend of financial conditions. In 1999, 2007, and 2015, as shown in the chart below, financial conditions were being tightened, which led to more brutal contractions as liquidity was removed from the financial system.
Currently, the risk of a more “substantial decline,” is somewhat mitigated due to extremely easy financial conditions. However, such doesn’t mean a 5-10% correction is impossible, as such is well within market norms in any given year.
This is particularly the case given how extreme positioning by both institutions and individual investors has become. With investor cash and bearish positions at extreme lows, with prices extremely extended, a reversion to the mean is likely and could lean toward to the 10% range.
One of the other big concerns remains the concentration of positions driving markets higher. Lawrence Fuller analyzed this particular extreme in the market. (H/T G. O’Brien)
“One similarity between the Four Horseman of 2000 and the mega-caps of 2020 is their tremendous influence on the overall market, as can be seen below by their cumulative weightings. The weighting of today’s top five names is now 17.3%. I’m not suggesting that history is going to repeat itself, but often it rhymes.
If you lived and invested through the 1990s, as I did, then you’ll understand what I am talking about when I say that the dot-com boom was a sentiment-driven rally. I’m starting to see the same explanation for the current rally, as there really haven’t been any concrete fundamental developments to explain or validate it. The momentum stocks are rising in price day after day on hopes and expectations, and Wall Street analysts are happy hop on board for the ride, as usual.”
Lawrence is correct. There has not been a fundamental improvement to support the rise in the market currently. As shown in the chart below, S&P just released its 2021 estimates for the S&P 500, which is estimated to come in at $171/share.
What you should notice is that estimates for 2021 are now $3 LOWER than where estimates for the end of 2020 stood in April 2019. Importantly, between April 2019 and present, as earnings estimates were continually ratcheted lower, the S&P 500 index rose by 17.5%
While Apple, which we own, is the “cheapest” of the “4-horseman” currently, it is only “cheap” because of rather aggressive share repurchases. Here are some interesting stats:
In the 5-years from 2015:
Earnings per share (EPS) grew by just $2.69 per share or $0.53 per share annually.
Sales only grew by $26.45 billion or $5.29 billion/year.
Shares outstanding, however, declined by 1.13 billion
However, during that same 5-year period, Apple’s share price has risen by 210%.
The only reason Apple “appears” to be cheap is because of the massive infusion of capital used to reduce the number of shares outstanding. As a business, it is a great company, but it is a fully mature company, which is struggling to grow revenues. With a P/E of 27 and price-to-sales (P/S) ratio of 5.36, investors are grossly overpaying for the earnings growth and will likely be disappointed with future return prospects.
So why do we still own Apple? Because “fundamentals don’t matter” currently as the momentum chase, fueled by the Fed’s ongoing liquidity interventions, has led to a “runaway train.” But, understanding that eventually fundamentals will matter, is why we have taken profits out of our position twice since January 2019.
Just remember, “price is what you pay, value is what you get.”
Next Stop, 3500
As noted last week, in July of 2019, we laid out our prognostication the S&P 500 could reach 3300 amid a market melt-up though the end of the year. On Friday, the S&P 500 closed at 3329, with the Dow pushing toward 29,350.
With the Federal Reserve continuing to pump liquidity into the market currently, we are raising our 2020 estimate for the S&P to 3500 as “the mania” goes mainstream. There is absolutely NO FUNDAMENTAL basis for raising the target; it is ONLY a function of the momentum chase.
This urgency to take on “risk,” as investors pile into “passive indexes” under a “no market risk” assumption, can be seen in the extreme lows of the put/call ratio.
With the Federal Reserve’s ongoing “Not QE,” it is entirely possible the markets could continue their upward momentum towards S&P 3500, and Dow 30,000. Clearly, the “cat is out of the bag” if CNBC even realizes it’s the Fed:
“On Oct. 11, the central bank announced it would begin purchasing $60 billion of Treasury bills a month to keep control over short-term rates. The magnitude of the purchases resembles the quantitative easing program the Fed conducted during and after the financial crisis.”
“The increase in the Fed’s balance sheet has been in near lockstep with the stock market’s climb. The balance sheet has expanded 10% since October, while the S&P 500 shot up 12%, including notching its best fourth quarter since 2013.”
With the Federal Reserve continuing to “ease” financial conditions, there is little to derail higher asset prices in the short-term. However, we continue to see cracks in the “economic armor,” like Friday’s plunge in “job openings,” continued deterioration in earnings estimates, weaker growth rates in employment, and negative revisions to data, like wages, which suggest the market is well ahead of the economy. (Last week, negative revisions wiped out all the wage growth for the bottom 80% of workers.)
But, as I said, “fundamentals” don’t matter currently. As CNBC noted:
“The problem front and center is how investors are looking past the continuous earnings rout, betting on a snapback as soon as the first quarter of 2020. S&P 500 earnings are expected to drop by 0.3% in the fourth quarter of 2019, marking the first back-to-back quarterly decline since 2016, according to Refinitiv.”
While “fundamentals” may not seem to matter much currently, eventually, they will.
Troop Injuries “Emerged Days After”: Pentagon’s Shifting Iran Attack Casualty Narrative Gets More Absurd
A mere days ago the American public was still being told there were no American casualties as a result of Iran’s Jan.8 ballistic missile attack on an Iraqi base hosting US forces.
And over a week ago, days following the attack, Secretary of Defense Mark Esper said there was only damage to property at Al-Asad air base, going so far as to underscore: “Most importantly, no casualties, no friendly casualties, whether they are US, coalition, contractor, etc.,” according to an official statement at the time.
But after on Friday it was revealed that eleven US soldiers were injured in the attack — some of them significantly given they were flown out of Iraq to be treated for head injuries — belatedly confirmed by US officials, the Pentagon is now pretending there was never a discrepancy in its clearly shifting accounts. Eight were actually flown all the way to medical facilities in Germany for advanced treatment, with three flown to Kuwait.
Defense Secretary Mark Esper speaking at the Pentagon, via the AP.
“The Pentagon said on Friday there had been no effort to play down or delay the release of information on concussive injuries from Iran’s Jan. 8 attack on a base hosting U.S. forces in Iraq, saying the public learned just hours after the defense secretary,” Reuters reports.
And then of course the gratuitous implication that anyone claiming otherwise has a conspiracy theory agenda: “This idea that there was an effort to de-emphasize injuries for some sort of amorphous political agenda doesn’t hold water,” Pentagon spokesman Jonathan Hoffman said.
Even CNN flatly charges that “Official US reports about the attack have shifted since it occurred.” This much is obvious to anyone regardless on both sides of the aisle, whether supporters of Trump’s Iran policy or not:
Asked about the apparent discrepancy, a Defense official told CNN, “That was the commander’s assessment at the time. Symptoms emerged days after the fact, and they were treated out of an abundance of caution.”
Now the Pentagon’s explanation appears to be that Esper wasn’t even informed of the eleven injured personnel until Thursday, as “only a certain set of injuries” are required to be reported to the Defense Secretary’s office, according to CNN.
“Immediate reporting requirements up to the Pentagon are for incidents threatening of life, limb or eyesight, so actually (Traumatic Brain Injury) wouldn’t rise to that threshold,” Pentagon spokesperson Alyssa Farah said on Friday.
Photos which have emerged from Iraq’s al-Asad airbase where US forces are stationed show extensive damage from the Iranian ballistic missile attack, via Scripps.
In summary, the Pentagon wants you to believe that the biggest military attack on US forces in the Middle East in years via Iranian ballistic wasn’t really that closely monitored for casualties… as if the entire upper echelons of the DoD chain of command had better and “more important” things to do than to closely monitor and assess injuries from the strike.
Next we’ll be informed there was some innocuous and casual Netflix binge-watching in Pentagon offices the days following Iran’s major ballistic missile attack on American forces. When you’ve lost even CNN and the entire mainstream, you’ve most definitely lost the plot.
The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:
If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.
He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.
What Is a Liquidity Trap?
In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.
Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.
For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.
Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.
In his writings, however, Keynes suggested that a situation could emerge when an aggressive lowering of interest rates by the central bank would bring rates to such a level from which they would not fall further. As a result, the central bank would not be able to revive the economy. This, according to Keynes, could occur because people might adopt the view that interest rates have bottomed out and that rates should subsequently rise, leading to capital losses on bond holdings.
As a result, people’s demand for money will become extremely high, implying that people would hoard money and refuse to spend it no matter how much the central bank tries to expand the money supply. As Keynes wrote,
There is the possibility, … that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.
Keynes suggested that once a low–interest rate policy becomes ineffective, authorities should step in and spend. The spending can be on all sorts of projects — what matters here is that a lot of money must be pumped to boost consumers’ confidence. With a higher level of confidence, consumers will lower their savings and raise their expenditure, thereby reestablishing the circular flow of money.
Is There Too Little Spending?
In the Keynesian framework, the ever-expanding monetary flow is the key to economic prosperity. What drives economic growth is monetary expenditure, and when people spend more of their money, it implies that they save less.
Conversely, when people reduce their monetary spending in the Keynesian framework, it is viewed as a sign of increased saving. In this way of thinking, saving is considered bad news for the economy — the more people save, the worse things become. (The liquidity trap comes from too much saving and a lack of spending, so it is held.)
Observe, however, that people do not pay with money but rather with the goods that they have produced. The chief role of money is as a medium of exchange. Hence, the demand for goods is constrained by the production of goods, not the amount of money. (The role of money is to facilitate the exchange of goods.)
To suggest that people could have almost an unlimited demand for money that supposedly leads to a liquidity trap is to suggest that people do not exchange money for goods anymore.
Obviously, this is not a realistic scenario, given the fact that people require goods to support their lives and well-being. People demand money not merely in order to accumulate it but to employ it in exchange.
Money can only assist in exchanging the goods of one producer for the goods of another. The medium of exchange service that it provides has nothing to do with the production of final consumer goods. This means that it has nothing to do with real savings, either.
What permits the increase in the pool of real savings is the increase in capital goods. With more capital goods, i.e., tools and machinery, workers’ ability to produce more goods and of an improved quality is likely to increase. The state of the demand for money cannot alter the amount of final consumer goods produced — only the expansion in the pool of real savings can boost the production of these goods.
Likewise, an increase in the supply of money does not have any power to grow the real economy.
Contrary to popular thinking, a liquidity trap does not emerge in response to a massive increase in consumers’ demand for money but comes as a result of very loose monetary and fiscal policies, which inflict severe damage to the pool of real savings.
The Liquidity Trap and the Shrinking Pool of Real Savings
According to Mises in Human Action,
The sine qua non of any lengthening of the process of production adopted is saving, i.e., an excess of current production over current consumption. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way.
As long as the growth rate of the pool of real savings stays positive, productive and nonproductive activities can be sustained.
Trouble erupts, however, when, on account of loose monetary and fiscal policies, a structure of production emerges that ties up much more consumer goods than it releases. That is, the consumption of final goods exceeds the production of these goods. The excessive consumption relative to production of consumer goods leads to a decline in the pool of real savings. This in turn weakens the support for individuals that are employed in the various stages of the production structure, resulting in the economy plunging into a slump.
Once the economy falls into a recession due to the falling pool of real savings, any government or central bank attempt to revive the economy must fail. Not only will these attempts fail to revive the economy, they will deplete the pool of real savings further, prolonging the economic slump.
The shrinking pool of real savings exposes the erroneous nature of the commonly accepted view that loose monetary and fiscal policies can grow an economy. The fact that central bank policies become ineffective in reviving the economy is due not to a liquidity trap, but to the decline in the pool of real savings. This decline emerges due to loose monetary and fiscal policies. To stave off personal bankruptcy, individuals are likely to increase their holdings of money — cash becomes king in such a situation.
The ineffectiveness of loose monetary and fiscal policies to generate the illusion that the central authorities can grow an economy has nothing to do with a liquidity trap. The policy ineffectiveness is always relevant whenever the central authorities are attempting to “grow an economy.” The only reason why it appears that these policies “work” is because the pool of real savings is still expanding.
“We’re Ready To Fight”: 1000s Expected At Massive Gun-Rights Rally At Virginia Capitol
As various pro-gun rights groups prepare to gather at Virginia’s state capitol in Richmond on Monday in what’s expected to be one of the largest pro-gun rallies in recent memory, Democratic Gov. Ralph Northam has declared a state of emergency, police are busy setting up barricades and temporary holding pens – and one lawmaker has even arranged to spend most of the day in a safe house, according to the Washington Examiner.
The rally is expected to draw tens of thousands, and fears about Charlottesville-style violence are prompting police to scour the web for any signs of a violent plot.
Already, the FBI has arrested three alleged members of a violent white supremacist group who were planning on attending the rally.
As Republicans battle for the hearts and minds of the people against a state government that is unilaterally controlled by Democrats, Todd Gilbert, Virginia’s House Republican leader, warned on Saturday that white supremacist groups trying to spread “hate, violence, or civil unrest” would not be welcome at a pro-gun rally in the state’s capital on Monday, according to Reuters.
“Any group that comes to Richmond to spread white supremacist garbage, or any other form of hate, violence, or civil unrest isn’t welcome here,” he said. “While we and our Democratic colleagues may have differences, we are all Virginians and we will stand united in opposition to any threats of violence or civil unrest from any quarter.”
Organized by the Virginia Citizens Defense League, a group that annually lobbies the state legislature against new gun-control laws, this year’s rally is simply a much larger manifestation of the group’s annual gun-rights rally at the capitol.
As the Dems who control the state government plot a slew of new gun control measures in a state that has historically been more permissive about gun rights, Virginia has transformed into ground zero in the fight over gun rights in America. Already, gun owners across the state have been scrambling to buy up as many guns as they can before the new legislation takes effect, fostering a boom among gun sellers.
The tension even prompted President Trump to weigh in with a tweet on Friday: “That’s what happens when you vote for Democrats, they will take your guns away.”
Your 2nd Amendment is under very serious attack in the Great Commonwealth of Virginia. That’s what happens when you vote for Democrats, they will take your guns away. Republicans will win Virginia in 2020. Thank you Dems!
One NRA member approached by a Washington Examiner reporter while rallying outside a legislative building earlier this week said gun-rights advocates in the state wouldn’t stand by idly while their rights are stripped away.
“We’re not going to be quiet anymore. We’re going to fight them in the courts and on the ground. The illegal laws they’re proposing are just straight up unconstitutional,” said Timothy Forster, of Chesterfield, Virginia, an NRA member who had one handgun strapped to his shoulder and another tucked into his waistband as he stood outside a legislative office building earlier this week. VCDL president Philip Van Cleave said he’s heard from groups around the country that plan to send members to Virginia, including the Nevada-based, far-right Oath Keepers, which has promised to organize and train armed posses and militia.
While the rally has attracted a substantial amount of media attention, Virginia’s gun-rights activists have identified another strategy to try and subvert the state legislature’s authority. As the New York Times reports, gun-control activist Philip Van Cleave and others are pushing municipalities around the state to pass or consider “2A Sanctuary” legislation that would in effect preserve certain gun rights in towns across the state.
Anyone planning on the attending the rally should keep this in mind: Dems have permanently banned guns inside the Capitol building, and Gov. Northam has declared a temporary state of emergency to ban all weapons from Capitol Square during the rally – a plea for the state SCOTUS to rule these measures unconstitutional was rejected on Friday – to prevent “armed militia groups storming our Capitol.”
Of course, even though organizers have taken pains to block far-right militias and outright white supremacists from attending the rally, we imagine these efforts will be lost on MSNBC, which should waste no time declaring every participant a dangerous gun nut.
