Decentralization Is The Solution To The Government Shutdown Problem

Authored by Ryan McMaken via The Mises Institute,

The partial shutdown with the federal government has helped, perhaps more than any other recent political event, to illustrate some of the biggest problems that come with centralizing an ever-larger number of government activities within a single, centralized institution.

Were the US government more decentralized, we’d not now be facing a nationwide systemic failure that has continues to cripple the private sector in many ways.

Held Hostage by a Shuttered Regulatory State

The federalization of resources and regulatory power over the past century has created a situation in which numerous industries depend on licensing and regulatory approval from federal regulators to function. And yet, thanks to the shutdown, these industries can do little when facing a federal government that imposes mandates, but won’t provide the agency “services” necessary to allow agencies to function under those mandates.

For example, As The Washington Post has reported , those areas where the federal government has a large regulatory footprint — such as Alaska — are at the mercy of politicians thousands of miles away.

Most (61 percent) of Alaska is government land managed by five different federal agencies, according to the congressional Research Service. The state’s main industries, including fishing, tourism and oil and gas, all depend on the day-to-day actions of federal workers and regulators.

The fisheries have so far avoided major disruption, despite a few close calls. Most boats are still getting by on licenses and inspections which occurred before the shutdown.

But time is running out. Major commercial boats are required to carry onboard observers to monitor their catch. But when they return from a trip, those observers must be debriefed by the National Marine Fisheries Service — and it’s not holding debriefings during the shutdown.

Alaska is an extreme example, but other states that also have sizable federal ownership of land (which includes most western US states) are also affected. Nationwide, states with coastal states that depend on the smooth-functioning of federal regulation of fisheries and natural resources affected as well.

And it doesn’t end with natural resources. With the Tax and Trade Bureau shut down , breweries can’t ship beer. That leaves an entire industry up in the air, and small craft brewers are affected the most. As the shutdown continues, more of these workers can expect their paychecks to eventually dry up due to a lack of revenue.

Meanwhile, the FTC, the SEC, and the FCC are all partially shut down .

Some anti-government activists might look at this and say, “great, we don’t need those agencies anyway!” But here’s the problem: although those agencies’ staff members may be staying home, that doesn’t mean the private sector is no longer subject to the mandates and regulations those agencies oversee. Private companies still must obtain all the usual licenses and regulatory approvals from federal agencies. It’s jsut that federal agencies are no longer available to make approvals or answer questions.

That’s hardly something to celebrate.

In short, all the usual federal roadblocks exist to stymie the private sector. Except now, there are even fewer ways to get around those roadblocks. What’s even worse is that this problem is nationwide.

Were these regulatory powers and agencies decentralized out of the hands of the federal government, of course, we wouldn’t be looking at a nationwide problem. Were a single state to experience a “shutdown” — something that is extremely rare at the state level, by the way — we wouldn’t now be facing a nationwide problem in which whole industries are facing crippling regulatory bottlenecks. Problems would be limited to single states. And those states that were prone to shutdowns or other regulatory bottlenecks would see an exodus of industry and capital.

Nor would we be facing a situation in which 800,000 federal employees — nationwide — are currently unpaid. This is a problem that has been made much larger in scope by the centralization of government power.

The Federal Government Has Too Many Issues on Its Plate

Another reason to decentralize is to end a situation in which government shutdowns are more likely due to the broad scope and complexity of the federal budget and federal responsibilities.

In the United States, the federal government’s prerogatives have expanded over the past century to include everything from old-age pensions, to highways, to health care regulation, to farming subsidies, and much more. This has all been added on top of the more traditional federal prerogatives of foreign policy. It’s only natural then that the likelihood of shutdowns would increase as the number of areas for political conflict increases.

After all, the current shutdown does not come out of only a dispute over of a border wall. It is a larger issue that stems from the fact that the Democrats want to use the wall’s potential funding for a myriad of other uses. And, the larger the federal government has grown, the possible targets for government spending has grown ever larger.

Moreover, even the issue of building border walls was not always a federal issue. Prior to the late nineteenth century, state governments were the governments that dealt with the issue of limiting migrants in-flows. Although some conservatives now create ornate legal arguments in attempts to prove immigration — a separate issue from naturalization — has always been a job of the federal government, the actual historical experience makes it clear the federalization of immigration policy is itself a later innovation.

So, we’re now left with a federal government where the president and the legislature can argue endlessly over every little thing under the sun. If it’s the federal government’s job to control and fund everything from cancer research to national parks, then it’s only matter of time until we endure a political impasse over one of the countless issues being discussed.

Nor is it just the scope of issues. The sheer size and scope of the United States is itself problematic. The US is so large, and culturally and demographically diverse, that significant disagreements over how federal prerogatives ought to be used are inevitable. A less fragile and more responsive system grows out of a decentralized political system that allows for diversity in policies that affect travel, education, poverty relief, and more. If education policy, for instance, is decided at the state level, then we can be sure we’ll never see a federal shutdown over funding of schools. It simply becomes a non-issue at the federal level.

The Solution Lies in Decentralization

The solution lies in removing from the federal government its authority over such a wide range of issues, and to allow diversity and localism in government. This naturally includes welfare programs, public lands, airport security, law enforcement, military land forces, immigration, and the regulatory state.

As it is, American governmental institutions — being so dependent on federal funding and regulatory oversight — are now fragile, bloated, unresponsive, and prone to political bottlenecks. We now see this at work. 

The problems we now encounter with the shutdown ought to placed squarely at the feet of those who have called endless for ever greater levels of federal control over state and local communities, while centralizing both financial and regulatory power under within a single institution. Not everything needs to turn into a nationwide systemic problem when the federal government encounters a political impasse. We ought to take steps now to limit the damage the feds can do.

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This Is The One Chart Every Trader Should Have “Taped To Their Screen”

After a year of tapering, the Fed’s balance sheet finally captured the market’s attention during the last three months of 2018.

By the start of the fourth quarter, the Fed had finished raising the caps on monthly roll-off of its balance sheet to the full $50bn per month (peaking at $30bn USTs, $20bn MBS, although on many months the B/S does not actually shrink by this full amount which depends on the redemption schedule) and by end-Q4 markets also experienced some of the largest volatility and drawdowns in nearly a decade. As Nomura’s George Concalves writes in a Friday letter, whether it was a coincidence or not, broader markets questioned the Fed’s original view that B/S roll-off was going to be like “watching paint dry.” Indeed, recent Fedspeak has shifted to being more open-minded, with Fed policy makers suggesting that they are prepared to be “flexible” in implementing their balance sheet policy.

The reason for that is that as both the market and the Fed (and especially Chicago Fed president Charles Evans) were violently reminded, just as QE added liquidity and boosted all asset prices, so QT is draining liquidity from the system. Worse, as Marko Kolanovic wrote in his latest report from Jan 16, given the recent collapse in liquidity and the toxic feedback loop of flows- liquidity-volatility which we discussed last week, “investors are very attentive to monetary policy measures that may affect liquidity.”

And since the most closely watched metric of systemic liquidity is once again the pace of the Fed’s balance sheet change, and specifically, reduction, Kolanovic notes the recent example of a sharply negative market reaction to the comment that balance sheet reduction (Quantitative Tightening or QT) will be on autopilot (and positive reaction when this statement was later modified). Additionally, even casual remarks on the balance sheet has dramatic and “significantly negative intraday impacts on markets” (such as Powell’s recent remarks that the balance sheet should be “substantially smaller”).

But why, Kolanovic asks rhetorically, is there such a focus on the Fed’s balance sheet from investors?

The answer is obvious: by now only clueless hacks will deny that adding liquidity in the form of QE was the single, most important factor driving asset classes higher over the past decade. According to JPMorgan, the impact of QE was ~20% of equity prices (see the bank’s report here).

Yet while qualitatively the answer is simple, complications arise when one tries to quantify the impact of the balance sheet shrinkage. Specifically, as the JPM quant notes, the questions investors struggle with are how negative was/will be the impact of the QT, to wit: “It is plausible that dollar for dollar, QT has a significantly larger impact than QE.”

The reason for that, according to Kolanovic, has to do that may be the previously discussed fragility feedback loop. During QE, both central banks and investors, and certainly HFTs and algos, would broadly buy assets in an environment of low volatility/ increased liquidity when the impact is small, while during QT “assets are typically sold while liquidity is removed, compounding the negative impact of other outflows.”

Others have also tried to quantify the impact of QT on risk assets, most recently Morgan Stanley, which last week calculated that every $20 billion decline in Mortgage Backed Securities held by the Fed leads to a 0.37% drop in the S&P (curiously, MS found that S&P 500 returns are not significantly correlated with changes in the Fed’s Treasury holdings, although that observations will surely be retested soon).

As a result, Morgan Stanley calculates that based on the recent MBS runoff of $15bn per month, the projected S&P 500 return impact is -3.3% for 2019, with the real estate sector hit the hardest.

Yet while Morgan Stanley believes it may have found the causality link between the Fed’s B/S size and its impact on the market, JPM disagrees, and in his note Kolanovic assets that to his knowledge, “there is no broadly accepted understanding of the exact mechanics and magnitude of QT’s impact (e.g., how much it is a signal to the market, vs. mechanical supply/demand and price impact).”

Instead, he suggests that while there is a significant relationship between the Fed’s balance sheet changes and the market, the big drivers of this relationship are points when the large QE programs were announced such as March 2009 (e.g., when this point is taken out, the relationship no longer appears statistically significant).

In other words, unlike Morgan Stanley’s attempt to extrapolate correlation into causation, JPMorgan is more intellectually honest, stating that “whatever the real mechanical impact of QT is, the indirect impact on market sentiment is likely much larger”, in other words stocks drop as traders expect QT to drain liquidity and impair stocks, selling in the process and resulting in a self-fulfilling prophecy.

In a somewhat similar analysis, Nomura fixed income strategist George Concalves suggests a compromise option, noting that while his own analysis found little correlation of the smaller balance sheet to the SP500 (“unlike what was seen during the QE days where stocks had an eerie visual relationship to the actual size of the B/S”) he did notice weekly B/S changes could be impacting markets.

As an example, he notes that the weeks where MBS holdings were paying down and/or weeks around the time the total size of the roll-off for both UST and MBS exceeded $20bn, markets would come under pressure with the most striking of those periods at the time being the February VIX shock. Additionally, in 2018 there were some “chunky” roll-off and around those weeks there was market volatility and drawdowns (especially in late October and November). To fine tune its analysis, Nomura looked at market performance for a few weeks after large roll-off weeks. It found that while in Feb 2018 it looks like the higher 10yr rates impulse was just as easily the driver of the SP500 declines a couple weeks later, by end-2018 the QT narrative was well entrenched and even then stocks would decline either before or after the larger rolloff periods.

So confirming Kolanovic’s view that QT is a self-fulfilling prophecy, Goncalves muses that perhaps “markets were anticipating these moves and discounted them. Meanwhile, going back to Kolanovic’s reflexive take on QT and the market, the JPM strategist notes recent intraday movements on balance sheet mentions, as well as the price action of the S&P 500 during Q4 shown in the chart below.

So what does all this mean for markets?

The answer remains generally unclear, with Nomura concluding that while it believes that “QT is tightening”, it is not “straight forward and seems to come in rolling aftershocks of liquidity draining and markets adjusting positions.” Meanwhile, the more actue impact of MBS QT on markets “makes sense as those securities are not zero-risk weight (as are USTs) and take up capital and/or need to be a substitutes for other credit products (which impacts FCI).”

Going back to Kolanovic, the JPM quant generally agrees with Nomura, and writes that while there may be little or no mechanical impact on equity prices, most macro traders will not “fight the Fed”, meaning when liquidity is added they are buying assets, and when liquidity is removed they are selling assets. Finally, to justify his thesis that QT, for now at least, impacts markets largely as a result of feedback loops and quirks in behavioral finance, Kolanovic also notes that over the past months, “we have heard a large number of  anecdotes where investors avoid buying risky assets during (or actively sell into) weeks when there is a significant balance sheet reduction, e.g., traders taping the schedule to their screens, blogs and email chains, etc..“

JPMorgan’s conclusion: whatever the mechanism or sequence of events by which QT affects markets, there is no denying that the shrinking of the Fed’s balance sheet does affect the S&P in an adverse way: “balance sheet reductions put significant strain on market sentiment, on flows and on the weakest link in the market – the liquidity-volatility-flow feedback loop. If the balance sheet reduction is a signal to sell, volatility increases, liquidity decreases, and additional systematic flows are triggered.” As a result, Kolanovic warns that “balance sheet driven market fragility is thus increasing the risk of market disruptions and ultimately the risk of a recession – which is in contrast to policy makers’ intentions.”

Naturally one can argue this point very easily, and note that if true, then Kolanovic’s assessment suggests that absent the Fed’s balance sheet, the world would be in a singular depression right now if indeed the modest shrinkage of the Fed’s balance sheet from $4.5TN to $3.9TN risked a recession. Consider that there is still another almost $2 trillion to go before the Balance sheet is “renormalized” and one can see why the Fed is not only trapped, but will never be able to renormalize without jeopardizing both the fake market and global economy erected over the past decade on the back of $16 trillion in central bank balance sheet expansion, i.e. liquidity.

But that’s a problem for another day.

For now, we’ll conclude with the schedule that JPMorgan says “traders tape to their screens, blogs and email chains” – the complete QT calendar consisting of past and projected Fed Balance sheet QT periods, courtesy of Nomura’s George Goncalves. Needless to say, self-fulfilling prophecy is most likely to be validated during the “dangerous” QT weeks which are highlighted in red, when the Fed’s balance sheet shrinks especially aggressively,such as Feb 20, April 3, and May 1 and 15.

 

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Democrats Reject Trump’s “BRIDGE Act” Deal, Say “Not A Good Faith Effort”

Well that didn’t take long.

In fact, even before President Trump has issued his “major announcement,” Democratic leaders were pre-emptively rejecting his ideas.

Trump’s BRIDGE Act made two offers to Democrats in exchange for $5.7 billion in funds for a border wall: Extend DACA protections for Dreamers, who were brought to the U.S. illegally as children, and extend the legal status of Temporary Protected Status (TPS) holders.

Half an hour before the speech, House Speaker Nancy Pelosi said in a statement:

“Democrats were hopeful that the President was finally willing to re-open government and proceed with a much-need discussion to protect the border.

Unfortunately, initial reports make clear that his proposal is a compilation of several previously rejected initiatives, each of which is unacceptable and in total, do not represent a good faith effort to restore certainty to people’s lives.”

Pelosi further slammed the deal for not including “the permanent solution for the Dreamers and TPS recipients that our country needs and supports.”

Additionally, Democratic Whip Dick Durbin also issued a statement:

“First, President Trump and Senate Majority Leader McConnell must open the government today.  Second, I cannot support the proposed offer as reported and do not believe it can pass the Senate.  Third, I am ready to sit down at any time after the government is opened and work to resolve all outstanding issues.”

A Democratic aide characterized the forthcoming offer from Trump as “non-serious product.” 

“Dems were not consulted on this and have rejected similar overtures previously. It’s clearly a non serious product of negotiations amongst [White House] staff to try to clean up messes the president created in the first place. [The President] is holding more people hostage for his wall,” the aide said. 

Day 30 of the shutdown seems inevitable…

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Curious Bedfellows: The Neocon And Progressive Alliance To Destroy Donald Trump

Authored by Philip Giraldi via OffGuardian.com,

The Roman poet Ovid’s masterful epic The Metamorphoses includes the memorable opening line regarding the poem’s central theme of transformation. He wrote In nova fert animus mutatas dicere formas corpora, which has been translated as “Of shapes transformed to bodies strange, I purpose to entreat…”

Ovid framed his narrative around gods, heroes and quasi-historical events but if he were around today, he would no doubt be fascinated by the many transformations of the group that has defined itself as neoconservative. The movement began in a cafeteria in City College of New York in the 1930s, where a group of radical Jewish students would meet to discuss politics and developments in Europe. Many of the founders were from the far left, communists of the Trotskyite persuasion, which meant that they believed in permanent global revolution led by a vanguard party. The transformation into conservatives of a neo-persuasion took place when they were reportedly “mugged by reality” into accepting that the standard leftist formulae were not working to transform the world rapidly enough. As liberal hawks, they then hitched their wagon to the power of the United States to bring about transformation by force if necessary and began to infiltrate institutions like the Pentagon to give themselves the tools to achieve their objectives, which included promotion of regime change wars, full spectrum global dominance and unconditional support for Israel.

The neocons initially found a home with Democratic Senator Henry “Scoop” Jackson, but they moved on in the 1970s and 1980s to prosper under Ronald Reagan as well as under Democrat Bill Clinton. Their ability to shape policy peaked under George W. Bush, when they virtually ran the Pentagon and were heavily represented in both the national security apparatus and in the White House. They became adept at selling their mantra of “strong national defense” to whomever was buying, including to President Obama, even while simultaneously complaining about his administration’s “weakness.”

The neoconservatives lined up behind Hillary Clinton in 2016, appalled by Donald Trump’s condemnation of their centerpiece war in Iraq and even more so by his pledge to end the wars in Asia and nation-building projects while also improving relations with the Russians. They worked actively against the Republican candidate both before he was nominated and elected and did everything they could to stop him, including libeling him as a Russian agent.

When Trump was elected, it, therefore, seemed that the reign of the neocons had ended, but chameleonlike, they have changed shape and are now ensconced both in some conservative as well as in an increasing number of progressive circles in Washington and in the media. Against all odds, they have even captured key posts in the White House itself with the naming of John Bolton as National Security Adviser and Mike Pompeo as Secretary of State. Bolton’s Chief of Staff is Fred Fleitz, a leading neocon and Islamophobe while last week Trump added Iran hawk Richard Goldberg to the National Security Council as director for countering Iranian weapons of mass destruction. Goldberg is an alumnus of the Foundation for Defense of Democracies, which is the leading neocon think tank calling incessantly for war with Iran.

Meanwhile, the neocon metamorphosis is nearly complete as many of the neocons, who started out as Democrats, have returned home, where they are being welcomed for their hardline foreign policy viewpoint. Glenn Greenwald reports that, based on polling of party supporters, the Democrats have gone full-Hillary and are now by far more hawkish than the Republicans, unwilling to leave either Syria or Afghanistan.

The neocon survival and rejuvenation is particularly astonishing in that they have been wrong about virtually everything, most notably the catastrophic Iraq War. They have never been held accountable for anything, though one should note that accountability is not a prominent American trait, at least since Vietnam. What is important is that neocon views have been perceived by the media and punditry as being part of the Establishment consensus, which provides them with access to programming all across the political spectrum. That is why neocon standard-bearers like Bill Kristol and Max Boot have been able to move effortlessly from Fox News to MSNBC where they are fêted by the likes of Rachel Maddow. They applauded the Iraq War when the Establishment was firmly behind it and are now trying to destroy Donald Trump’s presidency because America’s elite is behind that effort.

Indeed, the largely successful swing by the neocons from right to left has in some ways become more surreal, as an increasing number of progressive spokesmen and institutions have lined up behind their perpetual warfare banner. The ease with which the transformation took place reveals, interestingly, that the neocons have no real political constituency apart from voters who feel threatened and respond by supporting perpetual war, but they do share many common interests with the so-called liberal interventionists. Neocons see a global crisis for the United States defined in terms of power while the liberals see the struggle as a moral imperative, but the end result is the same: intervention by the United States. This fusion is clearly visible in Washington, where the Clintons’ Center for American Progress (CAP) is now working on position papers with the neoconservative American Enterprise Institute (AEI).

One of the most active groups attacking President Trump is “Republicans for the Rule of Law,” founded by Bill Kristol in January 2018, as a component of Defending Democracy Together(DDT), a 501(c)4 lobbying group that also incorporates projects called The Russia Tweets and Republicans Against Putin. Republicans Against Putin promotes the view that President Trump is not “stand[ing] up to [Vladimir] Putin” and calls for more aggressive investigation of the Russian role in the 2016 election.

DDT is a prime example of how the neoconservatives and traditional liberal interventionists have come together as it is in part funded by Pierre Omidyar, the billionaire co-founder of eBay who has provided DDT with $600,000 in two grants through his Democracy Fund Voice, also a 501(c)4. Omidyar is a political liberal who has given millions of dollars to progressive organizations and individuals since 1999. Indeed, he is regarded as a top funder of liberal causesin the United States and even globally together with Michael Bloomberg and George Soros. His Democracy Fund awarded $9 million in grants in 2015 alone.

Last week, the Omidyar-Kristol connection may have deepened with an announcement regarding the launch of the launch of a new webzine The Bulwark, which would clearly be at least somewhat intended to take the place of the recently deceased Weekly Standard. It is promoting itself as the center of the “Never Trump Resistance” and it is being assumed that at least some of the Omidyar money is behind it.

Iranian-born Omidyar’s relationship with Kristol is clearly based on the hatred that the two share regarding Donald Trump.

Omidyar has stated that Trump is a “dangerous authoritarian demagogue… endorsing Donald Trump immediately disqualifies you from any position of public trust.”

He has tweeted that Trump suffers from “failing mental capacity” and is both “corrupt and incapacitated.”

Omidyar is what he is – a hardcore social justice warrior who supports traditional big government and globalist liberal causes, most of which are antithetical to genuine conservatives. But what is interesting about the relationship with Kristol is that it also reveals what the neoconservatives are all about. Kristol and company have never been actual conservatives on social issues, a topic that they studiously avoid, and their foreign policy is based on two principles: creating a state of perpetual war based on fearmongering about foreign enemies while also providing unlimited support for Israel. Kristol hates Trump because he threatens the war agenda while Omidyar despises the president for traditional progressive reasons. That hatred is the tie that binds and it is why Bill Kristol, a man possessing no character and values whatsoever, is willing to take Pierre Omidyar’s money while Pierre is quite happy to provide it to destroy a common enemy, the President of the United States of America.

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Watch Live: President Trump Makes “Major Announcement”

After tweeting news of a “major announcement,” leaks and reports suggest President Trump will not be going full-emergency over the border funding but will be offering a compromise deal, involving DACA, in an effort to end the longest government shutdown in history…

He has since pushed it back to 4pmET..

As The Hill reports, some Senate Republicans have floated the possibility of exchanging DACA protections for border wall money amid the stalled talks. However, a bill with a similar deal fell flat in the House, with lawmakers saying that a deal to reopen the government by trading wall funding for immigration benefits for so-called Dreamers doesn’t stand a chance in the lower chamber.

Democrats have said they don’t trust Trump to keep his end of bargains, and are wary of negotiating a deal that could benefit those in the DACA program while harming other undocumented immigrants.

Watch live here…

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“Stay Alert!” Trader Warns Of “New Manufactured Reality” In Markets

Authored by Sven Henrich via NorthmanTrader.com,

I’ll provide a more in-depth technical update over the weekend, but just some quick thoughts and perspective as we are witnessing this melt-up during this OPEX week. My main message: Stay Alert.

Markets are back inside the consolidation range they broke below last December. What crash? What correction? It’s as if nothing has happened. But actually a lot has happened.

Earnings expectations have crumbled:

Confidence has plummeted:

Economic data has continued to slow across the globe and the US. The government is on week 3 of a shutdown with no apparent end in sight shaving off 0.1% of GDP growth per week and plenty of companies, including $AAPL, have come out and have warned about their outlooks for 2019.

Yet stocks have not only rallied (which we expected to alleviate oversold conditions), but they have done so in a vertical fashion with not even a hint of red:

One red candle in all of 2019. 11 blue candles in a row. So what has changed? Two things and two things only: January 4th. China intervened and has since proceeded with record liquidity injections and Jerome Powell and every FOMC central banker thereafter has promised flexibility and patience. That’s it. While the macro backdrop has worsened the central bank two-step has once again changed the price discovery dynamic to nothing but up.

And so yes one can sense the return of the low volatility grind which says to buy every tiny dip and shut your brain off:

And because of this you get to hear a new manufactured reality:

“We’re going to have a fairly significant slowdown in the economy, in earnings, in attitudes and everything…slower growth is the ticket to extending this recovery and its bull market… if price and wage pressures, were to stay at bay, the Federal Reserve could stay on the sidelines, and follow through on Fed Chairman Jerome Powell’s promise earlier this month that central bankers “will be patient” on interest rates given continued muted inflation”.

There’s been a barrage of people who did not predict the 20% crash in Q4 come out and state why the slowdown is good news. Their principle rationale: The Fed. Why then pretend anything else matters or has ever mattered. It’s not about earnings or growth or anything.

Expanding growth is bullish. Slowing growth is bullish too. Got it.

And that is the reality we are now again facing: Nothing matters. Hence good news is good news and bad news is good news, in short all news is good news whether it’s real or not. Case in point: Numerous China headlines indicating positive news to come. How many times have we heard this in the past year? Maybe it’ll happen and if it does a rally may well be justified.

But again, it hasn’t happened yet and there’s still no definitive evidence that it will.

Hence I like data, it stares you in the face and gives unemotional context as to where we are.

And we are here:

The corporate debt bomb keeps on ticking and business models that wouldn’t be able to sustain themselves during any other period are staying alive as long as rates stay historically low and hence markets are reacting to a Fed being suddenly being patient. The can is kicked once more.

And that’s why I presume participants are not freaking out over a $3B cash burn rate for $NFLX in 2019.

Look away, nothing to see here:

Yet nothing that’s happening on the price front now is unexpected, perhaps the one sidedness of it all, but not the destination.

Here’s what I said to clients on January 2nd:

And here we are:

One can’t predict the future, but markets can be predictable sometimes. So nothing that’s currently happening is unexpected in terms of the technical reconnect picture.

Indeed it all fits with the structural script I outlined in December mentioning the 2000/2001 market structure. A blow-off top early in the year, a yearly low in the December of that same year and then a big rally into January right into a slowing economy with risks of recession rising.

This is what I showed you in Imbalance:

What happened then in 2001 after the big rally in January when everybody got bullish again and declared the lows to be in?

This:

Back then it was a 10% rally into the December highs and then it was lights out with new lows coming a month later and again the following month. Each market is different, and we may not see new lows, but I can note some distinct similarities between then and now.

So before everybody declares victory and thinks happy days are here again all that’s changed of substance so far is mostly talk by central bankers and liquidity injections by China. Perhaps that’s enough and that’s all that’s needed, but be clear the larger macro environment has worsened, not improved, hence my view remains: Stay Alert. More this weekend.

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Rebel UK MPs Are Planning To Seize Power From Theresa May

As Prime Minister Theresa May struggles to hash out a deal during the cross-party talks she promised after her Brexit withdrawal agreement was defeated by a stunning 230-vote margin, marking the worst defeat for a British government since the 1920s, a group of MPs are apparently so frustrated with this whole Brexit trainwreck that they’re willing to risk being effectively expelled from their parties (or what Brits call “deselection”) for a shot at a workable solution.

Case in point: According to reports published by Buzzfeed and CNN an influential cross-party group of MPs lead by Tory Remainer and former Attorney General Dominic Grieve is moving to table an amendment that would effectively tear up the parliamentary rule book and allow a mass of backbencher MPs to seize power from the government – something that would be practically unprecedented in the history of British politics – to decide what business comes before the Commons.

May

Ultimately, the measure would be intended to allow Parliament to pass legislation to delay Article 50 and put off Brexit, something that May is reportedly quietly considering as an option but has continued to publicly oppose. This comes after MPs earlier this month passed two amendments that limited May’s ability to run out the clock to force MPs to vote for her deal by threatening a ‘no deal’ scenario as the only alternative.

If the new amendment, which the group plans to table on Monday, the same day when May is expected to present her “Plan B”, which is expected to be put to a vote the following week. If the motion is brought for a vote, it would mark the fifth high stakes vote in the House of Commons this month (the two prior amendments, the deal vote, the no confidence vote and now this).

Here’s Buzzfeed with a synopsis of the plan…

Rebels are now coalescing around a new amendment which would overturn centuries of constitutional rules that give government business precedence in the Commons.

If the amendment succeeds, it would allow a motion put forward by a minority of 300 MPs across five parties – including 10 MPs from the governing party – to stand as the first order of business.

This would let a cross-party coalition of backbench MPs to grab power from the government and allow bills to be brought up and considered by the House.

Legislation could then be tabled by backbenchers to block a no-deal Brexit – something for which there is likely to be a Commons majority.

…and a draft of the amendment.

Brexit

The plan, which MPs are calling European Withdrawal 3.0, backbenchers would be able to compel the government to request that Article 50 be delayed.

A critical part of the bill – dubbed European Withdrawal 3.0 – would postpone the UK’s departure from the European Union on March 29 if parliament fails to agree on a way forward by then. That is the day on which Article 50 – the timetable for the UK’s withdrawal – expires. Any extension would have to be agreed by the other 27 members of the EU.

According to a research paper just published by the House of Commons library, the bill means that “the government would be compelled to request an extension of the two-year negotiating period under Article 50.” It says “the drafters of the Bill specifically contemplate an extension of just over 9 months, from 29 March 2019 to 31 December 2019.”

But it’s still unclear whether this plan has a strong chance of passing, given that no clear consensus alternative to May’s plan has emerged. One MP who opposed the plan told CNN that he believes seizing power from the government would be an affront to the British people, who voted for Brexit. The notion that the amendment would allow a minority of 300 MPs to control what business is brought in front of the House of Commons is also controversial as it cuts against the constitutional principal mandating that only a government with a majority be able to control business.

“I cannot think of any precedent for Parliament giving itself control over the government. It is genuinely historic. We used to take power from kings and peers and now we are arguably taking it away from the British people, and we are doing it in an arbitrary way because we do not like what they have said.”

However, one MP who apparently supports the effort said the notion that it would be somehow undemocratic isn’t accurate, because any final decision would still require the support of a majority MPs.

“…An MP involved in the plan insisted: “The idea that there’s something undemocratic about this when anything that ultimately happens will require a majority is cobblers.”

Regardless of what happens, while US markets are closed on Monday for the Martin Luther King Jr. Day holiday, it’s looking like it will be another extremely eventful day in the UK.

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Rising Credit-Card Use Shows Consumers Are Strapped

Authored by Danielle DiMartino Booth via LinkedIn.com,

Americans are increasingly reaching for the plastic in their wallets to cover what their paychecks won’t.

Even though evidence is mounting that the U.S. economy may be soon heading into a recession, there are plenty of analysts who say that the surge in credit card borrowing is a sign of strong confidence among households. That’s hardly the case. In fact, households’ confidence in the future growth of their incomes has been cooling since late last summer, which means borrowers will only reach for what’s in their wallet to compensate for what their paychecks will not cover.

Many working adults have no recollection of credit card borrowing not being a mainstay among their financing options. But then, few would be able to identify a Diners Club card, which was a popular brand during the 1980s “yuppie” era when Americans first began to embrace credit card spending in earnest. These days, consumers are not keen to lean on credit cards, partly due to a cultural and financial shift in the industry.

The financial crisis arguably altered households’ views on charging beyond their means. It didn’t hurt that the availability of subprime credit all but disappeared for a few years or that the interest rate on credit cards remained in double-digit territory despite the Federal Reserve’s zero interest rate policy. That said, the idea of frugality re-entered many households’ thinking in the wake of the severe hardship the foreclosure crisis brought to bear on millions of working Americans. Debit cards became the predominant form of plastic used at the checkout.

And yet, consumer credit likely rounded out 2019 at a new $4 trillion milestone as runaway higher educationand car-price inflation coupled with ridiculously looser lending standards pushed households to take on record levels of student loan and auto debt. At roughly $1 trillion, credit cards are but a co-star in a star-studded, full-length feature film. A long history of credit card borrowing suggests that we would have multiples of today’s $1.04 billion in outstanding balances had the growth rate of spending on plastic maintained the headier double-digit paces clocked in the 1980s and 1990s.

Credit Card Borrowing Decouples from Income Expectations in Current Cycle

Several factors worked to slow the rate of credit card usage, few of which were virtuous. The past several recoveries were characterized as “jobless” due to the prolonged period required to recapture prior cycle highs in the employment-to-population ratio and anemic wage growth that persisted in such environments. And while credit card spending certainly held up during the years the housing bubble was inflating, households didn’t have to lean near as hard on plastic when their homes had infamously become de facto ATM machines.

The question is where credit card borrowing goes from here in view of the deteriorating economic outlook. August marked the high in income expectationsas measured by Conference Board data. If history is precedent, there will be a rush to tap available credit as households become increasingly aware that the economy is headed into recession.

Challenger, Gray & Christmas layoff announcements began rising on an annualized basis in August. And the quits rate, as measured by the Job Openings and Labor Turnover Survey, or JOLTS, peaked in August. Janet Yellen, a labor economist by training, was known to lean heavily on the quits rate, which rises as workers gain increased confidence in the availability of jobs. And finally, confidence among small businesses, which we know are the largest source of job creation, also peaked in August. There is a pattern.

You may note that the effective personal income tax rate — defined as the taxes paid on income, including realized net capital gains and on personal property — has tended to move up alongside credit card borrowing with two exceptions in the history depicted. The 1980s and the current episode are marked by falling income taxes, hence the decline in this tax rate ahead of recession. It’s intuitive that this holistic tax rate also rises as stocks rally throughout an expansion and declines into recession as the swing factor of capital gains drives the marginal moves.

Add it all up and it’s likely that any rush to “charge it” will be a last gasp as income expectations continue to decline and eventually cross lines with credit card borrowing. The closer we get to recession, the more desperate a sign credit card borrowing is anything but a reflection on strengthening in household finances. Households wouldn’t be reporting that they expect their incomes to rise less if that was the case.

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Yellow Vests Battle Tear Gas And Aggressive Riot Cops During 10th Week Of Chaotic Protests

Despite freezing temperatures and rain, tens of thousands of Yellow Vest protesters took to streets across France on Saturday for a tenth consecutive week of demonstrations, completely ignoring French President Emmanuel Macron’s call for a “national debate” – the latest scheme we can add to the pile of failed gimmicks aimed at stopping the movement. 

And while the MSM is largely ignoring the size and scope of the protests, independent journalists, select foreign news outlets and others have been documenting the mayhem. 

Protesters assembled by the Invalides plaza near the National Assembly and marched through the city’s Left Bank in freezing temperatures. The demonstrations were largely peaceful but, according to reporters, clashes broke out late in the afternoon between police and demonstrators, some wearing masks, in Paris’ central Invalides district.

Protesters threw firecrackers, bottles and stones at the police who responded with water cannon and tear gas to push them back.

Authorities said there were around 7,000 protesters in Paris, some of whom gathered near the world-famous Champs Elysees, while there were similar demonstrations in major cities across France. Rallies took place in Toulouse, Lyon, Rouen and other cities.

According to the French Interior Ministry, there were less protestors across France on Saturday, with the official number standing at 27,000 at around 2pm local time.

A fire broke out at the Joan of Arc station in Toulouse, causing people to rush out and evacuate. The cause of the fire is currently unknown.

Twitter user @Bellingdawg is a highly recommended follow – both tweeting and retweeting footage you’ll never see on the evening news. 

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Luongo: Pelosi Fiddles While The Democrats Burn

Authored by Tom Luongo,

Nancy Pelosi (D – Boomers) has a problem. Scratch that, she has a number of problems, not counting her own ethical and moral shortcomings.

Pelosi is the Queen of Projection. She projects an air of invincibility while also projecting her weaknesses onto her political opponents. So, even though Nasty Nancy just got back her Speaker’s gavel, she does so at the weakest moment in the Democratic party’s history since World War II.

Democrats Are Close to Terminal Decline

The traditional three-headed coalition of the Democrats has been shattered. The middle class Union guys are gone. By the time Trump is done with her over border security Pelosi’ll lose a bigger swath of the Hispanic vote than she already has.

All that will be left is her warmongering, globalist, shills for the MIC and the Deep State. Bicoastal Smug Liberals.

Internal Revolt

But, the hollowing out of the middle class is Pelosi’s biggest problem. Betraying the former Bernie Bros was the beginning. The Democrats under her leadership give lip service to bank reform which, in turn, has the hard-core Socialist left fired up.

That’s what rock-star Alexandria Ocasio-Cortez represents. She is the face of what’s left of Occupy Wall St. And she has a strong, knee-jerk, anti-incumbent, anti-establishment momentum behind her.

It doesn’t matter that she’s 28 years old, has little to no life experience or a firm grasp on reality. This is politics and these are chaotic times. She already has an acronym (AOC) and a nickname. She’s important.

Warhorses like Pelosi don’t know how to change their ways this late in their game. They think they can buy off people like AOC and outmaneuver her.

Pelosi faced a serious challenge to her party leadership in the run up to being elected Speaker of the House again. And she paid for that smooth vote with AOC’s appointment to the House Financial Services Committee.

When you’re going for the kill-shot on Trump there can be no weaknesses perceived.

But the big betrayal by the Pelosi Set is on war and empire. The same arguments animating the GOP insurrection against Trump by neoconservatives keeps Pelosi’s Smug Liberal interventionists happy.

The leadership of both parties love the Empire. They work non-stop to keep that gravy train flowing. It’s how they stay in power, amass incredible personal fortunes and why the country at large — left, right and center — hates their guts.

Do you think AOC wins her primary if the DNC hadn’t been so thoroughly despicable to Bernie Sanders’ supporters?

Or such full-throated supporters of questionable foreign interventions?

Pelosi is betting her political farm on border security. She does so because it is the one issue which galvanizes both her corrupt leadership with the populist, socialist Left represented by AOC.

They all hate what they perceive as bigotry.

Gabbard: The Anti-Pelosi

And it is also a distraction from the real issue that Trump put front and center, the Democrats’ weakness on foreign policy.

By announcing the pull out of U.S. troops from Syria and Afghanistan he reminded everyone just how much Pelosi et.al. love spending your money bombing brown people overseas for their profit.

As I said, appearance of strength is all that matters in politics at this level. Pelosi cannot afford to look at all weak during a government shutdown she started to oppose Trump and regain the White House in 2020.

So, while Pelosi is focused on being the establishment’s mouthpiece for taking down Trump to regain control over the vast government machinery, rebellions are happening within her own party.

Enter Tulsi Gabbard. Gabbard has real promise as the anti-war/anti-empire insurrectionist within the Democrats. She is a leftist version of Ron Paul in that she’s hated by everyone who thinks they are someone.

Because nothing unites the DNC and the RNC like the threat of peace getting an audience on the national stage.

When “anti-incumbent” is the watchword of the day, Gabbard throwing her hat into the 2020 Presidential race is a big deal. Gabbard will get support from anti-war Republicans, Independents and Libertarians.

They will cross party lines to vote for her in primaries, hurting the anointed ones.

She will successfully fund-raise on ending useless and counter-productive engagements in the Middle East. With her part of the Presidential conversation it forces her opposition to adopt her positions while simultaneously supporting Trump’s struggle against his own staff.

Trump should give her a lifetime membership to Mar-a-Lago.

Yes, she’s a mess economically, but that’s not where her value lies. She’s everything the current Democratic party isn’t: attractive, conscientious, brave and committed to peace.

Pelosi’s Corner

And that is a nightmare for Pelosi. She’s positioned herself as being against whatever Trump is for. That makes her an easy foil for him.

With Gabbard in the race Trump can go hard on foreign policy and create havoc in the Democratic primaries. As long as he stays in the game, Gabbard is his stalking horse.

Don’t underestimate the political points he scored with canceling Pelosi’s overseas trip. This is the Donald Trump we asked for — end politics as usual.

Confront the banal hypocrisy of our ruling class.

And, most importantly, call out the cheap virtue signaling hacks like Pelosi get a free pass on every day in the media.

Trump made it clear that if Pelosi wants to conspire with foreign leaders against him that she can do it on her own dime.

And having the shutdown as the excuse in a perfect game of brinkmanship made it even more effective.

Pelosi acts like she has Trump dead to rights on petty corruption thanks to Mueller’s songbird Michael Cohen. I don’t discount how hard they are gunning for Trump now. But like Theresa May in the U.K. over Brexit, there is only so much people will take in service of petty party infighting.

Eventually a real political revolt occurs. Just ask Italian Democrats or Emmanuel Macron.

So Pelosi has to be careful how she plays her hand here. She’s losing to Trump on the wall. Every day the argument against it looks both silly and hysterical. $5.7 billion is less than one week’s interest on the national debt.

But, she’s pot committed to her position that ‘walls are immoral.’ What she may find out here is that if you back someone like Trump into a corner and promise to destroy everything he has, then he then has nothing left to lose.

And that is when he is most dangerous to not only her but to everyone she’s beholden to. After that her own people’s knives come out.

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