Brexit Withdrawal Agreement Published: Here Are The Highlights

The much anticipated Brexit Withdrawal Agreement has finally been published and can be found at the following link.

Coming in at 585 pages, the draft agreement will be closely scrutinized over the coming days but here are some of the highlights:

  • UK and EU to use the best endeavours to supersede Ireland protocol by 2020
  • UK can request extension of the transition period any time before July 1st, 2020
  • EU, UK See Level-Playing Field Measures in Future Relationship
  • Transition period may be extended once up to date yet to be specified in the text
  • EU and UK shall establish single customs territory and Northern Ireland is in same customs territory as Great Britain

The future relationship document is less than seven pages long. It says the U.K. and EU are seeking a free-trade area with cooperation on customs and rules: “Comprehensive arrangements creating a free trade area combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition.”

The wording might raise concerns among Brexiters who don’t want regulatory cooperation and the measures on fair competition could amount to shackling the U.K. to EU rules.

Perhaps most importantly, regarding the controversial issue of the Irish border, the future relationship document says both sides aim to replace the so-called backstop – the thorniest issue in the negotiations – with a “subsequent agreement that establishes alternative arrangements for ensuring the absence of a hard border on the island of Ireland on a permanent footing.”

In fact, as Bloomberg notes, the word “backstop,” which has been a sticking point over the Irish border for weeks, is mentioned only once in the text.

As Bloomberg further adds, the withdrawal agreement makes clear that the U.K. will remain in a single customs area with the EU until there’s a solution reached on the Irish border. It’s what Brexiteers hate, because it makes it more difficult for the U.K. to sign its own free-trade deals, which they regard as a key prize of Brexit.

Predictably, EU Commission President Juncker said decisive progress has been made in negotiations:

Meanwhile, as analysts comb over the documents, Jacob Rees-Mogg, chairman of the European Research Group, has already written to Conservative lawmakers urging them to vote against the deal. He says:

  • May is handing over money for “little or nothing in return”
  • The agreement treats Northern Ireland differently from the rest of the U.K.
  • It will “lock” the U.K. into a customs union with the EU
  • It breaks the Tory election manifesto of 2017

More as we see it.

* * *

The full document is below:

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‘Raging’ Bull Patterns – It’s Now Or Never For The Rip

Authored by Sven Henrich via NorthmanTrader.com,

Technical analysis is about identifying potential tradable edges, be it with patterns and/or pivot levels of support and resistance. I say potential because there are no guarantees in anything and one must know when a pattern, for example, is either no longer valid or when it is confirmed.

Since last week I’ve been discussing a potentially very bullish pattern with a specific price target which I also highlighted in the most recent weekly market update: Battle Lines.

Specifically I’ve been talking about the potential for a bullish inverse pattern to emerge:

As I’ve stated the pattern had room into the 2712 area on $ES to build a potential right shoulder.

Since then we’ve seen a rejection of the .618 fib highs and then a multi day reversal culminating in today’s overnight action where we’ve seen 2711 being hit precisely and have since bounced off of that level:

I will have to again point out that this pattern will not confirm until it breaks above its neckline at recent highs.

So there’s a lot that needs to happen and plenty can go wrong with this pattern. It’s a potential pattern, but what is noteworthy is that it has so far played very precisely according to the structure I proposed on November 8.

And, in context, it may be worth pointing out that this pattern is now everywhere. No, I really mean everywhere, it’s pretty freaky actually:

$BKX:

$TRAN:

$WLSH:

And last, but not least or all, $NYSE:

As you can see there’s a big fat open gap on $NYSE dating back to the January highs. And note $NYSE has been a horrible chart all year. Never made new highs nor even approached old highs, then build a large channel this summer and fell through it like a wet noodle in October.

Just horrible action.

But are you sitting down? Check the math of this potential inverse pattern: Neckline 12680, bottom 11820, that’s 860 measured points to the upside on pattern confirmation. 12680 + 860 = 13,540. Gap fill. Done.

Merry Christmas.

Even $VXX is showing a sizable corollary Heads and Shoulder pattern:

So concurrent with all the horrible action and the depressing headlines there are raging bullish chart patterns in play everywhere.

Aside from these patterns are there signs that could support the notion of a massive rally emerging?

Actually yes.

Crude has been a horror show.

Yesterday I outlined a potential support zone:

So far crude has been trying to defend this area:

Should these lows hold crude has plenty technical room to rally.

Another potential glimmer for bulls is the 30 year yield:

New highs on a negative divergence opening the path for a potential, at least, short term retreat in yields.

And last, but not least $NDX. Note there 4 open gaps above:

All gaps fill if ever Art Cashin once famously quipped. We shall see.

Again, none of this is confirmed and it could all fall apart today for all I know.

And one must be aware of the risk factors.

For example there’s an open gap below on $SPX:

If we were to see a drop into this zone $SPX would really need to close above 2710 to keep the inverse pattern alive, otherwise the retest/new low scenario opens up quickly and there’s a potential technical pattern emerging for that case as well:

So bulls have to prove their case and fast.

What to look for to show that the inverse pattern may actually play out?

Simple, it starts with a close above the daily 5EMA and then a recapture of the 200MA currently at 2742 and 2763 respectively.:

Bottomline: The patterns are there. They are now screamingly obvious. Perhaps too obvious. Once patterns become too obvious they risk of not playing and that is the risk for bulls here. So they better step on it. Fast.

*  *  *

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Monsanto Owner Bayer Hit With Surge In Lawsuits After Losing California Cancer Case

German pharmaceutical and chemical giant Bayer has disclosed that 9,300 plaintiffs are suing them as of the end of October, alleging that that Roundup weed killers cause cancer. Bayer acquired the product in their $63 billion purchase of Monsanto. 

The plaintiffs claim that weed-killing products containing glyphosate have made them ill, and that the company knew or should have known the health risks, yet failed to adequately warn consumers of them. Monsanto claims that the compound is safe to use. 

“We continue to believe that we have meritorious defenses and intend to defend ourselves vigorously in all of these lawsuit,” said Bayer CEO Werner Baumann – however he added that “more lawsuits are to be expected.” 

“Glyphosate is an indispensable chemical for modern agriculture that is safe to use, very effective and saves resources,” said Baumann. “When used appropriately, glyphosate is a completely safe and good product … completely safe.“

In August, a San Francisco jury disagreed – awarding $289 million in damages to former school groundskeeper Dewayne Johnson, however he walked away with $78 million after the judge reduced his award. 

Bayer said there were 8,700 lawsuits pending against the company as of the end of August – which could cost the company billions in damages in the coming years. 

In September, 2017 the US Environmental Protection Agency (EPA) concluded that glyphosates were not likely carcinogenic to humans, based on a decades-long assessment. In 2015, the World Health Organization (WHO)’s cancer arm issued an opposite statement – warning that glyphosate was “probably carcinogenic to humans.” 

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As Growth Slows Down, The Fed Will Be The Last To Know

Authored by James Rickards via The Daily Reckoning,

You are well aware that the Federal Reserve is raising interest rates. This policy started in December 2015 with Janet Yellen’s “liftoff” from zero and has continued through seven more rate hikes in 2016, 2017 and 2018, with another hike expected this December.

The cumulative impact is to put the high end of the range for the fed funds rate at 2.5% by year-end. More of the same is widely anticipated for 2019. The endgame is a rate of 3.5% by early 2020. At that point, the Fed may pause to re-evaluate but may keep going.

The Fed calls this approach “gradual” but it’s not. There’s a huge difference between a 0.25% rate hike (that’s the Fed’s tempo per hike) starting at 2% versus starting at 6%. In both cases, the hike is 0.25%, but the impact on bond prices and economic activity is much greater when you start with the lower base. There are highly technical reasons for this, having to do with concepts called “duration” and “convexity.”

We don’t need to dive into those. Suffice it to say that hikes from a lower base are much more impactful. In short, the Fed’s policy today is a body blow to an economy that’s still recovering from the worst recession since the Great Depression.

Other major central banks are either following in the Fed’s footsteps (Bank of England) or preparing to do so in the near future (European Central Bank). Even the money-printing and stock-buying Bank of Japan has acknowledged the central bank’s game can’t go on forever. Leaving China to one side (it’s a political shell game leading to a historic credit crisis), the central banks are either raising rates or getting ready.

If this rate hiking were the only major monetary development in the world, that would create a challenging environment for investors in stocks, bonds, gold and real estate — all interest-sensitive in different ways. But it’s not the only major development.

Behind the curtain, central banks are either slowing down the printing presses or actually burning money. This marks the end of quantitative easing (QE) for the Bank of Japan and the ECB and the start of quantitative tightening (QT) in the case of the Bank of England and the Fed.

From 2008–2014, U.S. critics of the Fed complained about rampant money printing under the banner of QE. There was even a popular cartoon that showed Ben Bernanke on the outside of a helicopter with one hand on a strut and the other hand throwing money out of the helicopter with a wild-eyed look on his face. This was a send-up of the infamous “helicopter money” that Bernanke advocated, an idea he nicked from uber-monetarist Milton Friedman.

Many U.S. investors assume QE is still going on. It’s not. QE was reduced with the “taper” beginning in December 2013 and was stopped completely by November 2014. The Fed then kept money supply constant until October 2017 when QT began. Instead of Bernanke dangling from a helicopter, picture Jay Powell near a furnace with a shovel and a huge pile of $100 bills. Powell is madly shoveling the money into the furnace, burning it. That’s what reducing the money supply looks like, and that’s what the Fed is doing now.

This money burning, or QT, is officially called “balance sheet normalization.” The Fed increased its balance sheet from $800 billion to $4.4 trillion from 2008–2014 under the policy of QE. Now they’re trying to get back to a reasonable number. It won’t be $800 billion, but the target could be around $2.4 trillion. That’s still a $2 trillion money supply reduction from the 2014 high.

Analysts estimate every $600 billion of balance sheet reduction is roughly equivalent to a 1.0% hike in the fed funds rate.

So in addition to the 3.5% of rate hikes from 2015–2020, you can add on another 3.0% of implied rate hikes from QT. A total of 6.5% of rate hikes (3.5% nominal and 3.0% from QT) in five years from a zero base is one of the most extreme examples of monetary tightening in the history of the Fed.

It compares to the Volcker tightening from 1979–1981. Volcker intentionally set out to crush inflation even if it meant a recession (there were two recessions from 1980–1982). In contrast, there is no inflation on the horizon today and the economy is probably heading for a recession without any help from Jay Powell.

The global phenomenon is neatly illustrated in the chart below. This chart combines the QE and QT of the BoE, BoJ, Fed and ECB using colors to show the individual contributions of each central bank.

The Fed’s QE1 (2008), QE2 (2010) and QE3 (2012) stand out clearly in the three blue spikes. The BoE also had three waves of smaller magnitude shown as green waves from 2010–2016. The BoJ started late (in 2011) but has never stopped since, as shown in the red wave. Finally, the gray wave is the ECB. They were also late to the party but made it up in volume.

What’s important about this chart is not where we’ve been but where we’re going. The Fed is already in negative territory (the blue wave below the “0” line starting in 2018). The BoE is neutral but is also ready to go negative. The ECB and BoJ are still positive but trending down sharply; the ECB will go negative in 2019, according to current plans.

The black trend line shows the aggregate of all four central banks. It crashed in 2018 (mostly because of the Fed) and will go negative globally in 2019. Before long, our cartoon of Jay Powell shoveling cash into a furnace will have to be updated to include Mark Carney, Mario Draghi and Haruhiko Kuroda.

Americans today are celebrating back-to-back quarters of strong growth. That’s fine, but it’s dangerous to ignore the trend. Since April 2018, we’ve seen growth of 4.2% (Q2), 3.5% (Q3) and an estimate of 2.9% (Q4, per the Atlanta Fed). The trend is pointing down. This trend tends to confirm the view that 2018 growth was a “Trump bump” from the tax cuts that will not be repeated.

The trend line points to a return to the 2.2% growth that prevailed from 2009–2017. This is exactly what one would expect from the extreme tightening described above. As usual, the Fed will be the last to know.

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With Brexit In Chaos, Here Is What Goldman Thinks Will Happen Next

With Theresa May suddenly facing a fresh rebellion from within her cabinet, one which many speculate could result in a vote of no confidence as soon as tomorrow, ending her career and pushing the UK and Brexit in chaos, traders are once again asking what happens next.

One answer has just been published by Goldman strategist Adrian Paul who lays out how he sees the next steps in the Brexit withdrawal agreement.

As Paul summarizes the current state of events, while there is now a draft Withdrawal Agreement for the UK’s departure from the EU, it has been roundly criticised in Westminster. But although MPs of different stripes have united in their opposition to the Withdrawal Agreement, there is no consensus on what should replace it. Here, the Goldman analyst writes that relative to his base case, the shape of the Brexit deal looks likely to be in line, and its denouement “looks likely to be later.”

According to Paul, if at first pass the deal does not garner a majority in the House of Commons – which now looks increasingly likely –  there are three viable destinations:

  1. a subsequent, successful attempt to pass an amended Withdrawal Agreement;
  2. a second referendum; or
  3. a “no deal” cliff-edge departure.

Goldman then sketches out the possible paths to each destination, warning that some of those paths raise the prospect of a general election. That said, “we are still some way from the Brexit endgame.”

Goldman concludes on an optimistic note: “The UK is scheduled to leave the EU at the end of March 2019. Although the risks have intensified, we retain our base case that the House of Commons will ratify a Withdrawal Agreement by then. It is characteristic of European negotiations to come down to the wire.”

* * *

Below we lay out the key points from Goldman’s note:

1. What are the most contentious aspects of the draft Withdrawal Agreement?

The ‘Irish backstop.’ In some scenarios, this backstop would keep the whole of the UK in a customs union with the EU after Brexit.

The draft Withdrawal Agreement struck between the UK and the EU paves the way to a ‘status quo’ post-Brexit transition period, lasting from March 2019 until at least December 2020. The crucial ingredient – and the bone of contention that has delayed agreement thus far – relates to the ‘Irish backstop.’ The Irish backstop comes into effect if the EU and the UK are unable to agree a comprehensive free trade agreement that would obviate the need for a physical border between Northern Ireland (which is part of the UK) and the Irish Republic (which is part of the EU). Neither the EU nor the UK sees the activation of the Irish backstop as the most likely scenario. But a legally binding Irish backstop is required in the UK’s EU Withdrawal Agreement nonetheless.

The backstop looks likely to have four key characteristics: (i) a UK-wide customs union with the EU, with no supplementary customs union applying only to Northern Ireland; (ii) rules to ensure that the UK and the EU operate on a ‘level playing field’ in
terms of regulatory requirements on goods and services; (iii) no specified expiry date; and (iv) an independent arbitration mechanism to determine when the requisite conditions have been met to allow the UK to exit the mechanism.

Even if the contents of the draft Withdrawal Agreement do not constitute a major surprise, the response with which it has been met in Westminster has raised the risk of a disorderly Brexit.

2. What happens after Cabinet approval?

The denouement comes later, in our view. Probably in December, MPs in the House of Commons will vote on the Withdrawal Agreement. There, the Prime Minister carries a very slim majority.

In concrete terms, there are two domestic hur dles to safe passage of the Withdrawal Agreement. Once the deal is approved by members of the Prime Minister’s Cabinet, it must then be put to the House of Commons for ratification. In our view, neither of  these hurdles is low, but the latter is significantly higher than the former. Yesterday’s vocal opposition to the agreement has, to our mind, significantly raised the hurdle to Commons ratification.

This criticism has come from all quarters of Westminster. It began even before the draft agreement was widely disseminated. A prominent Eurosceptic Conservative MP argued that the draft agreement would bind the UK to rules which it had played no part in designing. A prominent Labour MP argued that, even if the draft agreement did not precipitate a general election, “all options” should remain on the table — including a second EU referendum, perhaps with “Remain” on the ballot. A prominent member of the Democratic Unionist Party (the DUP) argued that the draft agreement could “lead to the break-up of the UK…and is not something we can support”.

The breadth of this dissent matters. When it comes to ratification in the House of Commons, any one of a handful of factions in Parliament — be it the Eurosceptic Conservative MPs, the pro-EU Conservative MPs, the bulk of Labour MPs, or the DUP’s ten MPs — is influential enough to vote down the Withdrawal Agreement. To the extent that the critics of the Prime Minister’s negotiating stance have adopted a united front in recent days, this has raised the risk of a more protracted endgame.

3. How do the numbers look in the House of Commons?

The parliamentary arithmetic has looked tight for some time. It now looks tighter, given signs of greater unity among those who object to the draft Agreement.

The parliamentary arithmetic has looked tight for some time. For a working government majority, PM May relies on 10 MPs from the DUP. Assuming the Speaker and two Deputy Speakers do not vote, assuming Sinn Fein MPs do not take their seats at Westminster, and assuming only a few Labour MPs cross party lines, a handful of Conservative MPs is all that is required to vote down the Withdrawal Agreement.

Added to this, in recent days, one prominent Conservative MP resigned from his ministerial post. The former Minister for Transport published a critique of the government’s negotiating position, and called for a second referendum.

4. How meaningful is the “meaningful vote”?

This remains unclear. The government has sought to discourage counter-proposals. Opposition MPs have sought the legislative power to propose alternative Brexit paths.

The leaders of four opposition parties — Labour, Plaid Cymru, the Scottish National Party and the Liberal Democrats (which together occupy around 47% of seats in the House of Commons) — wrote to the Prime Minister yesterday, urging her to offer Parliament a “truly meaningful vote” on any Withdrawal Agreement.

The letter comes against the backdrop of written communication between the Brexit Secretary and all sitting MPs back in October. In that letter, the Brexit Secretary asserted that Parliament’s “meaningful vote” on the exit treaty negotiated between the EU and the UK must be “unequivocal”, and thereby “clear to the British public”.

By contrast, yesterday’s letter from opposition leaders asserts that, at a minimum, MPs must be allowed to table “multiple amendments” to the main motion by which the Withdrawal Agreement would be passed. In particular, the group of four signatories argued that “it would be reckless to present this vote as a take-it-or-leave-it without Parliament being able to suggest an alternative”.

The scope of the “meaningful vote” remains unresolved. But it accentuates the risk of a disorderly Brexit. The amendments tabled by MPs may advocate for a second referendum, or a different version of withdrawal, even if the EU does not signal a willingness to re-open negotiations. The more meaningful the “meaningful vote”, the wider the spectrum of scenarios that could follow once the Withdrawal Agreement is presented to Parliament.

5. What happens if Parliament votes down the deal?

We see three viable destinations : (i) a subsequent, successful attempt to pass an amended Withdrawal Agreement; (ii) a second referendum; or (iii) a “no deal” cliff-edge departure. The path to one or more of these destinations could involve a general election.

We see three viable destinations. Each destination could be reached via multiple paths.

Destination 1: A successful, second attempt in Parliament. Presumably, this would require some amendments to the current Withdrawal Agreement. The response of companies, households and financial markets to a fraught political environment may also affect the stance taken by those MPs who vote down the initial deal.

Amendments to the Agreement could arise via three routes:

Either: (1a) Theresa May continues as PM. She negotiates a different exit treaty with the EU, which then garners a majority in the House of Commons, under its current composition;

Or: (1b) Theresa May is replaced as PM, but there is no general election. A new Conservative PM negotiates a different exit treaty with the EU, which then garners a majority in the House of Commons, under its current composition;

Or: (1c) Theresa May either resigns as PM, or is replaced as PM, and there is a general election. A new Prime Minister — from whichever party — negotiates a different exit treaty with the EU, which garners a majority in the House of Commons, under a different composition.

The UK leaves the EU on 29 March 2019 with a Withdrawal Agreement.

Destination 2: A second referendum. This would require a more fundamental change in policy stance, on the part of both major parties. Senior ministers in the Conservative Party have, thus far, ruled out the possibility of a second referendum, ostensibly as a matter of principle. Senior ministers in the Labour Party have prioritised a general election over a second referendum, arguing that a new government should come to power if PM May cannot deliver a workable deal.

A second referendum could arise via three routes:

Either: (2a) The current government tables a motion to legislate for a second referendum. This motion garners a majority in the House of Commons, under its current composition;

Or: (2b) A coalition of opposition MPs joins with a minority of Conservative MPs. This coalition garners a majority in the House of Commons, under its current composition. The political momentum behind a second referendum intensifies. Theresa May calls a second referendum;

Or: (2c) A new general election returns a government that has either campaigned for a second referendum, or decides to call a second referendum after taking office.

Assuming the EU grants the UK an extension to the Article 50 deadline, the UK does not leave the EU on 29 March. A second referendum takes place in 2019. Other complications arise. It would not be straigthforward for Parliament to determine how the options in a second referendum shoud be specified, precisely. And there would be disagreement about whether the option to “Remain” could appear on the ballot paper.

Destination 3: A “no deal” cliff-edge departure. Suppose that, irrespective of the government of the day, Article 50 is not extended. The UK would move directly to WTO tariffs in its trade with the EU. Non-tariff barriers would come into force.

A “no deal” cliff-edge departure could arise via two routes:

Either: (3a) No new exit treaty can be reached between the UK and the EU;

Or: (3b) An amended exit treaty again fails to garner a majority in the House of Commons, irrespective of its composition.

The UK leaves the EU on 29 March 2019 with a “bare bones” agreement. This is a far cry from the ‘status quo’ transition embodied in the current draft Withdrawal Agreement.

6. Where are the risks to our base case?

Relative to our base case, the shape of the Withdrawal Agreement looks broadly in line. Its discontents look likely to be more united. And its denouement looks likely to be later.  This raises the risks appreciably. But we are some way from the endgame.

All in all, we maintain our base case that the Withdrawal Agreement struck between the EU and the UK will be ratified by the House of Commons by the end of the year, and ratified by the European Parliament before the end of March 2019.

The risks to that view have clearly intensified.

Within our base case, an ‘Irish backstop’ in which the entire UK remains within a customs union with the EU — even if that backstop were never to be triggered — raises the prospect of a Brexit end-state involving permanent customs union membership.

Off our base case, we see a successful, second attempt to pass a Withdrawal Agreement through Parliament as more likely than a second referendum. In turn, we see a second referendum as more likely than a “no deal” cliff-edge departure.

To be sure, several of the paths to the destinations we sketch out above raise the prospect of a general election in the next six months. Indeed, it has been precisely that prospect of a general election that PM May’s government has used in crucial votes in the past to assuage potential backbench dissent.

* * *

Got all that? No? Then here is a “simple” schematic summarizing most of the above in just one chart.

And now armed with all the latest hot takes, go out there and try make money trading the pound. Good luck.

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Waves Of Caravan Migrants Arrive In Tijuana, Begin Climbing San Diego Border Fence

As the first waves of Central American migrants arrive in Tijuana, dozens of people on the Mexican side of the border could be seen scaling the border fence – which oddly has a wide platform at the top, and none of the razor wire recently deployed further inland. 

Border Patrol released a statement Tuesday that said they believe some of those at the fence are members who were traveling as part of the Central American migrant caravan that originated in Honduras.

Migrants who reached the border fence in that area are from Honduras, Guatemala, Nicaragua, and El Salvador. Many are walking and will still need more time to reach the border, and those who have arrived already appeared to do so with the help of buses or other transportation. –Washington Examiner

On Monday, the first wave of migrants arrived in Tijuana; approximately 80 gay, lesbian and transgender asylum seekers who were bussed ahead by an anonymous organization after they say intolerant fellow asylum seekers were harassing them. 

“We were discriminated against, even in the caravan,” said Erick Dubon, 23, from San Pedro Sula, Honduras, who has been traveling with his boyfriend, Pedro Nehemias, 22. “People wouldn’t let us into trucks, they made us get in the back of the line for showers, they would call us ugly names.” –WaPo

Meanwhile, US Customs and Border Protection (CBP) announced that work began on Tuesday to “harden” the border crossing between Tijuana, Mexico and San Diego, using razor wire and other measures. Just not at the beach, apparently. 

As we reported on Tuesday, CBP closed four lanes at the heavily trafficked San Ysidro and Otay Mesa ports of entry in San Diego in order “to install and pre-position port hardening infrastructure equipment in preparation for the migrant caravan and the potential safety and security risk that it could cause,” according to CBS News and PBS. 

On Thursday, 1,100 Marines from Marine Corps Base Camp Pendleton in California were deployed to support border security, CBS San Diego affiliate KFMB reported. They were primarily tasked with installing concertina wire and pre-positioning jersey barriers, barricades and fencing.

…

The thousands of Central American migrants left shelters in Guadalajara early Tuesday and were taken by bus to a highway tollbooth to wait for rides to their next destination. Most appeared intent on taking the Pacific coast route northward to the border city of Tijuana, which was still about 1,350 miles away. The migrants have come about 1,500 miles since they started out in Honduras around October 13. While the caravan previously averaged only about 30 miles a day, the migrants are now covering daily distances of 185 miles or more, partly because they are relying on hitchhiking rather than walking. 

–CBS News

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Steen Jakobsen: The Four Horsemen Portend A Painful Reckoning

Authored by Adam Taggart via PeakProsperity.com,

Even the US is now “swimming naked“…

Steen Jacobsen, Chief Economist and Chief Investment Officer of Saxo Bank sees economic slowdown ahead.

Specifically, his “Four Horseman” indicators: the drivers of economic growth, are all flashing red. 

Jacobsen believes that the central banks will continue their liquidity tightening efforts for as long as they can get away with (i.e., until the financial markets start toppling over). In his opinion, they eased way too much for way too long; and the malinvestment and zombification that resulted needs to clear the system — and it will likely do so more violently and painful than the central banks will like:

I like to make things simple. Right now we have the Four Horsemen: the four drivers of the global economy. They are:

  • the quantity of money, which is falling;

  • the price of money, which is rising;

  • the price of energy,which is a tax on consumers and is rising;

  • and globalization/productivity, which is falling.

So, if you look at the economy as a black box, I really don’t know what happens inside of it. But I can observe what goes into the black box: it’s these four things.

Globalization / productivity, we know that’s all about Trump, trade war and the likes. It’s not exactly improving; it’s actually worsening.

As for the quantity of money, a lot of people argue with me that the Central Banks are still expanding their balance sheets, but the fact of the matter is that the QT in terms of the U.S has been reducing the Federal Reserve balance sheet. And we have a stealth reduction of the balance sheet in terms of the Bank of Japan. The EBC would love to cut and is publicly committed to doing so. The Bank of England is doing its first hike. So the quantity of money is falling.

As for the price of money, I think Powell is really in the mold of Volcker. He’s a practical guy, and what he’s decided to do is pretty much just to hike interest rates until the market collapses. That would indicate that pausing from this tightness is probably 5-10% below the recent low that we saw in the stock markets. If we don’t get to that level again, he’s going to continue the hiking.

So you almost have a self-feeding process by which, ultimately, the stock market will have to collapse because behind the scene, the pragmatic way that Powell does his policy really means the interest rate is going up and, hence, you haven’t seen your move to safety yet in terms of Treasurys.

And then, the final one, which is often ignored, the price of energy. Before the dramatic drop over the past few weeks, the price of energy was up at 15 to 20 percent this year in terms of the oil price input. But, if you add to the fallout from the emerging market selloff and the currency-negative impacts, you will have prices on petrol in energy-intensive countries like India, Indonesia, China where the prices are up somewhere between 50 and 100 percent. Imagine how much of the purse that expensive energy takes away from these developing economies in terms of the purchasing power.

So I think the full force of these Four Horsement that drive the world economy is now going to slow economic growth dramatically after this recent boost from the twin tailwinds of the tax cut and repatriation of capital. So even the U.S. now seems to be swimming naked.

Click the play button below to listen to Chris’ interview with Steen Jakobsen (48m:35s).

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Pence: “All-Out Cold War” Coming If China Doesn’t Change Course; “We Won’t Back Down”

The Washington Post’s Josh Rogin has revealed stunning comments issued by Vice President Mike Pence during a conversation between the two aboard Air Force Two as the VP traveled for an official trip to Asia this week, where he landed in Singapore for regional summits highlighting Indo-Pacific security, trade and investment. 

Pence reportedly said the White House is prepared to undertake take dramatic policy changes regarding China if Beijing does not capitulate to its demands as the trade war continues. In addition to the issue of tariffs, pressing security issues include the US demanding Chinese cessation of what’s reported to be widespread intellectual property theft and refusal to recognized America freedom of navigation through and above the South China Sea. 

According to Rogin, Pence went so far as to speak of “an all-out Cold War” during the interview, promising that:

If China wants to avoid an all-out cold war with the United States and its partners, it must fundamentally change its behavior, according to Vice President Pence. The United States, he assured me, won’t back down.

Pence head to Asia, via USA Today

Threat of initiating a “cold war” with China is one thing when analysts and op-ed pages have thrown the term into the public square of late; however, its quite another, constituting dramatically escalatory rhetoric, when the vice president of the United States says it. It represents a dangerous crescendo after months of down spiraling Washington-Beijing relations, and at a time when Russia is demonstrating its increasingly cooperative stance of solidarity with China. 

The words also come weeks before Presidents Trump and Xi Jinping are expected to meet on the sidelines of the G20 summit in Buenos Aires on November 30. Given the timing, we could also be witnessing the administration laying the groundwork for Trump’s classic “arguing from the extremes” to pressure foreign leaders to give up more during negotiations. 

According to Rogin’s op-ed:

Pence told me in an interview that Trump is leaving the door open for a deal with Xi in Argentina, but only if Beijing is willing to make massive changes that the United States is demanding in its economic, military and political activities. The vice president said this is China’s best (if not last) chance to avoid a cold-war scenario with the United States.

Referencing the G20 meeting, Pence said, “I think much of that will depend on Argentina.” In what is a clear message to Beijing ahead of the face-to-face meeting, Pence described: “The president’s attitude is, we want to make sure they know where we stand, what we are prepared to do, so they can come to Argentina with concrete proposals that address not just the trade deficit that we face… We’re convinced China knows where we stand.”

The US, Pence said further, is “in a strong position” for a potential escalation of the trade war it has already ongoing and vowed President Trump “won’t back down”. Hinting that Washington has much more in its arsenal, Pence continued: “We really believe we are in a strong position either way. We are at $250 billion [in tariffs] now; we can more than double that,” and affirmed, “I don’t think it’s a matter of promises. We’re looking for results. We’re looking for a change of posture,” according to the interview. 

China, however, has not shown a pattern of conceding to threats — in fact it’s demonstrated it’s often willing to risk confrontation with the West — the latest case in point being responding to US tariffs with its won protectionist measures, or in other instances aggressively intercepting US aircraft and navel vessels while laying claim to international waters as sovereign Chinese territory. 

With now explicit talk of a US-China “all out Cold War” coming from the administration it’s past time to remember “Thucydides Trap” theorist and author Graham Allison’s warning:

“If Thucydides were watching, he’d likely say all parties almost seem to be competing to show who can best exemplify the role as rising power, ruling power, and provocateur.“

— Graham Allison

This could easily lead to the following scenario base on the slightest provocation, according to Professor Allison: “What happens is that a third-party provocation, an accident, becomes a trigger to which one of the two feels obliged to respond and they find themselves in a war that neither wanted.”

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Gold Spikes Back Above $1200, Silver Above $14

After reaching its weakest relative to gold in 25 years, silver is modestly outperforming the yellow metal this morning as PMs break back above critical price levels amid Brexit confusion, crude chaos, and US bank selling.

And having touched 86, silver started to outperform today…

 

Gold back above $1200…

And Silver back above $14…

 

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These Are The Headlines You See At The Top Of A Bubble

Authored by Jesse Colombo via RealInvestmentAdvice.com,

The world had gone completely startup crazy over the last several years. Spurred by soaring tech stock prices (a byproduct of the U.S. stock market bubble) and the frothy Fed-driven economic environment, countless entrepreneurs and VCs are looking to start the next Facebook or Google. Following in the footsteps of the dot-com companies in the late-1990s, startups that actually turn a profit are the rare exceptions. Unfortunately, today’s tech startup bubble is going to end just like the dot-com bubble did: scores of startups are going to fold and founders, VCs, and investors are going to lose their shirts. In this piece, I wanted to show a collection of recent news headlines (all from Business Insider) that capture the zeitgeist of the tech startup bubble – please remember these when the bubble bursts and everyone says “what were we thinking?!”

These Silicon Valley venture capitalist trading cards should tell you where we are in the cycle (close to the end) (link):

When trillions of dollars worth of central bank “Bubble Money” is sloshing all over the globe looking for a home, startups are a popular holding container (link):

Since when did throwing “insane” amounts of cash into a hot industry end well? It never does and this time will be no exception. Masayoshi Son is definitely “Bubble Drunk”… (link):

So, she started as a VC at age 17?! And the companies she invested in are worth billions? That’s what happens when central banks hold interest rates at record low levels for a record length of time and flood the economy and financial markets with trillions of dollars worth of liquidity. As the old saying goes, “a rising tide lifts all boats.” Also, “never mistake a bull market for brains.” (link)

During a bubble, it is common to see fantastical stories about young wunderkinds getting hired for grown-up jobs, starting companies, making fortunes, etc. in the industry that is experiencing a bubble. (Undoubtedly, the parents play a very large role in opening doors for these kids and getting them media coverage – “it’ll look great when applying to Harvard!” ). Another example of this is the story of the 11 year-old “cryptocurrency guru” that was circulating during the crypto bubble earlier this year before the crypto price implosion. (link)

Pretty soon, you will see many more headlines like this (link):

I believe that a very high percentage of today’s startups are actually malinvestments that only exist due to the false signal created when the Fed and other central banks distorted the financial markets and economy with their aggressive monetary stimulus programs after the global financial crisis. See this definition of malinvestment from the Mises Wiki:

Malinvestment is a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses. “Wrong” in this sense means incorrect or mistaken from the point of view of the real long-term needs and demands of the economy, if those needs and demands were expressed with the correct price signals in the free market. Random, isolated entrepreneurial miscalculations and mistaken investments occur in any market (resulting in standard bankruptcies and business failures) but systematic, simultaneous and widespread investment mistakes can only occur through systematically distorted price signals, and these result in depressions or recessions. Austrians believe systemic malinvestments occur because of unnecessary and counterproductive intervention in the free market, distorting price signals and misleading investors and entrepreneurs. For Austrians, prices are an essential information channel through which market participants communicate their demands and cause resources to be allocated to satisfy those demands appropriately. If the government or banks distort, confuse or mislead investors and market participants by not permitting the price mechanism to work appropriately, unsustainable malinvestment will be the inevitable result.

As I’ve explained in a recent Forbes piece:

When central banks set interest rates and hold them at low levels in order to create an economic boom after a recession (as our Federal Reserve does), they interfere with the organic functioning of the economy and financial markets, which has serious consequences including the creation of distortions and imbalances. By holding interest rates at artificially low levels, the Fed creates “false signals” that encourage the undertaking of businesses and other endeavors that would not be profitable or viable in a normal interest rate environment.

The businesses or other investments that are made due to artificial credit conditions are known as “malinvestments” and typically fail once interest rates rise to normal levels again. Some examples of malinvestments are dot-com companies in the late-1990s tech bubble, failed housing developments during the mid-2000s U.S. housing bubble, and unfinished skyscrapers in Dubai and other emerging markets after the global financial crisis.

The chart below shows how recessions, financial crises, and bubble bursts have occurred after historic interest rate hike cycles:

I believe that rising interest rates and the overall tightening monetary environment will lead to the popping of today’s stock market bubble, which will then spill over into the tech startup bubble.

Please watch my recent presentation about the U.S. stock market bubble to learn more:

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