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Authored by James Howard Kunstler via Kunstler.com,

A lot of readers (some of them former readers now) have been angrily twanging me by email for writing about the three-year Resistance effort to un-do the 2016 election. I did not vote for Mr. Trump (or Mrs. Clinton) but I resent the coup mounted to overthrow him. I object to the bad faith and dishonesty of the Resistance. I object to the criminal misconduct among the federal bureaucracy, and the mendacity of its partners in the news media, and the hysteria they continue to generate — at the expense of other matters that concern our future.

The political disorder spooling out is the political expression of the long emergency that the nation faces as it finally encounters the limits to growth we were warned about decades ago. The techno-industrial phase of history is ending, and we are left only with inadequate fantasies for coming to terms with it and moving forward. The dynamic relationship between affordable energy supplies and the operations of money roils at the core of this predicament. They are undoing each other and the result will be a contraction of human activity. The big question we refuse to face is how to cope with contraction.

Beyond the ongoing orchestrated coup stands a reality-optional political Left consumed by serial hysterias, uninterested in truth, steeped in social despotism, and apparently willing to do anything to gain power. We should be very concerned with what they intend to do with that power. As they attempt to redistribute wealth, they will make the unhappy discovery that the wealth itself is subject to the wholesale contraction underway. The overvalued “assets” representing “money” hoarded by the “wealthy” will turn out to be figments of a runaway debt crisis. We have already debased the operations of banking, and the tokens that banks issue — currencies and securities — levitate over an abyss.

We already have plenty of evidence for what the Left will do to the principle of political liberty. Their shibboleths of “diversity” and “inclusion” really mean shutting down free speech and telling everybody how to think. They are less interested in “social justice” than in plain coercion, the pleasure they take in pushing people around. What’s worse is that they want to use government as the instrument for enforcing their will. I object to that not just on principle but because government itself will be subject to the same contraction affecting everything else. It simply won’t be able to compensate for all the other losses. Can we downscale its activities coherently, or will we make that journey violently, in some sort of civil war?

The Left seems to be opting for civil war.

It is surely underway among branches of government and the administrative bureaucracy I call the Deep State. Barack Obama, John Brennan and others set the intel and police apparatus against Mr. Trump and the war goes on in the latest reckless campaign of “whistleblowers” who are no such thing, but rather agents provocateurs of the Central Intelligence Agency.

The Democrats in congress play a dangerous game with this as they attempt to engineer a non-impeachment impeachment — that is, without a vote by the whole House. To allow that vote would be a move to allow the opposition to participate in issuing subpoenas and seeing evidence, and the Democrats are bent on to preventing that. That ploy will provoke the White House to ignore their subpoenas and demands for documents on the principle that this mode of “Impeachment” is not legitimate.

The machinations of Speaker Nancy Pelosi and Rep. Adam Schiff in this latest “whistleblower” affair pulsate with skullduggery. Are we to suppose that they will march out one “whistleblower” after another whose identity — or very reality — will remain secret through these proceedings? This is the sort of thing you get in Spanish inquisitions and soviet show trials. Until recently, all Americans had very firm objections to kangaroo courts and star chambers where the common-law safeguards of due process are thrown out the window. If the standoff goes to the Supreme Court, we’ll surely get yet another crusade to disqualify Justice Kavanaugh.

The Democratic Party is doing everything possible to destroy the legitimacy of these institutions — staring with elections themselves. The origins of the RussiaGate hoax will demonstrate that the party itself was behind “interference” in the 2016 election, and enlisted the help of several foreign governments in doing so. That is why they are so desperate to keep the level of hysteria amped to the max. The day may be not far off when a great and chilling silence falls over this mob as they look to the sky and see the indictments raining down.

A notable divergence has emerged between two key economic sentiment indicators: the ISM manufacturing survey and IHS-Markit PMI, which sent opposite signals of manufacturing activity in September, prompting some – such as Bank of America – to wonder which one is a more accurate indicator of the economy’s current state.

As BofA’s Michelle Meyer writes in a Friday report, “both have pros and cons and in the end we find that the most prudent course of action is to monitor both along with a range of other manufacturing indicators.” That said, on balance “the data show a weakening manufacturing sector but not a collapse as the ISM survey implied.”

Which indicator is better?

As BofA notes, markets were roiled last week as the much-watched ISM manufacturing survey fell further into contraction territory. The index declined from 49.1 in August to 47.8 in September, a ten year low.

In the ten minutes following the release, equity markets tumbled 0.5% before closing down 1.2% on the day.

Meanwhile, another survey of manufacturing – the IHS-Markit PMI – showed that the manufacturing sector remained in  expansionary territory in September.

Although the two measures often diverge in terms of magnitude, it is rare for the two signals to get crossed (though not in China, where the official PMI survey has traditionally diverged and generally been weaker than the Caixing PMI). In the US, BofA calculates that the two have only sent opposite signals roughly 13% of the time since IHS-Markit’s first print in May 2007. This divergence and the difference in the equity market response to the two indicators raise the question: which measure is the better gauge of manufacturing activity?

One or the other?

To answer this, BofA looked at the component indexes that make up both the ISM and IHS-Markit PMI. These indexes measure the month-over-month change of the following: production, new orders, employment, inventories and supplier deliveries. The bank’s economists then regressed the component index from each survey on the % mom change in the comparable “hard data”.

Fast forwarding to the results, BofA finds the coefficient on each survey index is statistically significant at the 5% level. Reducing the sample, however, results in only the employment and supplier deliveries components having statistically significant coefficients for both ISM and IHS-Markit PMI, suggesting that the 2008/09 recession skews the data. As expected, most of the models have a relatively low fit in the full sample and a nearly nonexistent fit in the reduced sample, which is somewhat problematic. There is one exception; the employment model has a reasonably strong fit over the full sample and a decent fit in the reduced sample. BofA thinks the consistency in the results across samples and measures suggests that it’d be prudent to look at both surveys when assessing the health of the manufacturing sector.

Two, it’s the magic number

To test whether or not looking at both measures is better than focusing on one, the bank ran the same exercise as above, only this time it treated the average of the two survey component indexes as its independent variable. Comparing the fit of all three models across the full sample period, we find that this approach yields a slightly better fit for most measures (Chart 3 above). This again, suggests that one shouldn’t discount the signal from either.

A manufacturing downturn any way you slice it

No matter what weight one assigns to either of the two surveys, “averaging out between the two surveys implies that the manufacturing sector has weakened but perhaps not to the extent suggested by the ISM measure.” In terms of assessing the state of the manufacturing sector, it is also helpful to look at a broader range of indicators. Looking back at how the data have evolved over the past year shows a substantial weakening in both survey-based measures and official statistics on the sector (see table and chart below). This is unsurprising given that the industry has faced a slew of headwinds ranging from broad factors like the trade war and fading fiscal stimulus, to industry specific factors like the Boeing 737 max groundings.

Where’s the sector headed? According to BofA, it ultimately boils down to future of the US-China trade war. While it’s likely that a couple of industry specific factors-the Boeing groundings and the General Motors United auto workers strike-prove to be transitory, the bank expects the broader trade war drag to persist. Therefore, it concludes, “the sector will likely continue to face an uphill battle.”

Spillover

BofA’s dour outlook on the manufacturing sector serves to magnify the focus on other sectors of the economy. As Michelle Meyer notes, she has argued time and again that the consumer remains strong and supportive of continued growth in the economy (even though Morgan Stanley is not so sure). However, even BofA admits that a persistent downturn in the manufacturing sector risks having a spillover effect into other areas of the economy. Indeed, we are now seeing evidence that the trade war has started to affect industries outside of manufacturing as indicated by the September ISM non-manufacturing index, which – both in Europe and the US – disappointed expectations and fell to a 3-year low (see below). We have also seen both total and service employment growth decelerate significantly from last year’s torrid pace.

The bottom line concern here is that these trends worsen as the US plans to raise tariffs by 5% on roughly $250bn of Chinese goods imports on Oct 15 and impose 15% tariffs on $160-170bn worth of goods on Dec 15.

As Meyer concludes, “trade talks between China and the US next week loom large. We don’t have high expectations.” And while Larry Kudlow managed to stage another impress short squeeze, the latest report from Bloomberg confirms that neither China nor the US have high expectations of any favorable announcement this week either…

Authored by Gary Galles via The Mises Institute,

Have you ever worked with people you couldn’t trust to tell you the truth? It isn’t pretty. Without the ability to rely on what you’ve been told (or that you’ve been told everything relevant), effective cooperation at almost every margin of choice is reduced, because its foundation has been undermined. A new episode of To Tell the Truth must precede every decision.

That problem of effective cooperation is exponentially increased when we expand our horizons to the many margins of choice at which people in society, the vast majority of which do not even know each other, interact. In a modern economy, all of us are dependent on multitudes of strangers not just for our prospering, but our survival.

The reason people don’t always communicate truthfully is that our reason serves our self-interest. Sometimes we perceive a strategic advantage at other people’s expense from intentionally deceiving them. Our words are also often ex post rationalizations to ourselves and others of why whatever we chose or did was a good idea. But that often makes what people say a frail reed to rely upon. And when political power is involved, the incentives for such deception and self-delusion are put on steroids, because the payoffs are far greater when backed by government’s coercive power.

As a consequence, accurate information about the issues most important to our ability to co-operate with others is often among the scarcest and most valuable of goods. Making it worse, the unknowably vast amount of potentially useful information—the infinite permutations of who, what, when, where, why and how–exceeds any individual or group’s ability to comprehend and integrate it. But voluntary market arrangements based on private property rights provide a powerful mechanism of cutting that problem down to manageable size.

Most of the time, we don’t really want to know all the details that might affect our productive interactions with others. We mainly want to know “how much”–what are the tradeoffs others are willing to make between goods, services, current versus future consumption, labor versus leisure, etc. The reason is that, regardless of their specific determinants, others’ willing tradeoffs determine our possibilities and constraints in any society that honors members’ self-ownership.

Expanding the mutually beneficial arrangements that are possible by accurately revealing such information is a central aspect of effective social coordination, as the seminal works of Ludwig von Mises and Friedrich Hayek have made clear. No central planners knows the tradeoffs each individual would make; only the individuals involved know that information. That requires a process to honestly reveal that information to those who will make choices regarding it, or the information will be effectively thrown away, along with the societal wealth creation it would enable.

Markets provide that honest information. While what people say may often be misleading to themselves and others, people reveal the truth about the tradeoffs they are willing to make when they engage in un-coerced exchange. What you do is often far more truthful than what you say.

Regardless of your words, if you actually buy a product for $10 out of your pocket, you reveal that you believe it is worth at least $10 to you; similarly, if you sell a product for $10, you reveal that what the money could purchase was worth more to you than the product. And those choices reveal valuable information about the real alternatives available to those who might choose to deal with you. In contrast, since politics is based on what people say rather than what they actually do, it often short-circuits our central mechanism for discovering the truth to better enable our cooperative potential.

In fact, a vast array of government interference in individuals’ voluntary exchange relationships substitutes lies for the truth that would otherwise be revealed. And in a world where relative scarcities are frequently the primary things we want to know from others, to combine with our more intimate knowledge of ourselves and our situations, the harm is massive.

Consider price ceilings, like rent controls. In their absence, market rents tell you the prices at which you can find apartments, reflecting the opportunity costs landlords face. But rent controls impose a price divorced from landlords’ opportunity costs, and at which many will often be unable to successfully rent an apartment. That is, it misinforms people that the opportunity costs are cheaper than they really are, and in the process makes knowledge of the terms at which apartments can generally be successfully rented largely disappear.

Price floors, like minimum wages, act in a parallel manner. In their absence, market wages tell you the prices at which you can generally find jobs. But a minimum wage dictates a price divorced from prospective workers’ opportunity costs, and at which many will often be unable to successfully get jobs. That is, it misinforms people that unskilled labor’s opportunity costs are higher than they really are, and in the process makes the knowledge of the terms at which jobs can generally successfully be gotten largely disappear.

Taxes, which are the price of the artificial input, “government permission to produce and sell,” reflecting coercively imposed government burdens rather than opportunity costs of inherently scarce goods and services, tell buyers that products are scarcer than they really are. The same is true of import restrictions, like tariffs and quotas, which raise prices above opportunity costs. The burdens of government regulations and mandates also act like taxes. Government barriers to entry and operation in markets similarly raise prices above what relative scarcity would dictate. All of these result in artificially higher prices, underuse and waste, compared to free markets.

Subsidies act in a parallel manner to taxes, but in the opposite direction. They communicate to prospective buyers that products are less scarce than they really are, leading to artificially low prices to consumers, overuse and waste, compared to free markets.

Not only do voluntary market interactions better reveal the truth about relative scarcities through pricing, they allow more accurate evaluation of other aspects of trading, such as product and service quality, than government.

The key (though often ignored) factor is repeat business. The usual scare stories to justify the “need” for government regulation involve one-time interactions, in which others can gain by “cheating” on what they promise. But the relevant question is not whether they can, but whether it is in their interest to do so. We don’t need government protection against things people will choose not to do, even if they could. And since almost everyone we deal with economically wishes to continue in business, effects on future business (directly, as when current customers refuse to deal with such suppliers in the future, and indirectly, through reputation effects on other current and prospective trading partners) act as a performance bond against misbehavior, leading to far better outcomes than the scare stories imply. As students of game theory recognize, repeated games generate very different strategies than one-shot games.

Consider an example. I can cheat you today by providing lower than claimed quality, and doing so would generate $1 million in increased profits for me. If it would leave my future business relationships unchanged, I have an incentive to do so. However, what if I expect the resulting damage to my reputation will lose me more than $1 in future discounted profits? I can cheat you, but I won’t because I have no incentive to. The problem in this case is solved by markets’ reputation mechanisms. Even if the future losses don’t completely eliminate my incentives to cheat, they sharply reduce them, letting much of the air out of the “we need government regulation to protect you” balloon.

This mechanism, while ignored by “nothing can be done if the state doesn’t do it” acolytes, is far from new. For instance, the famous Maghribi traders of Northern Africa relied on reputations to deal with problems in international trade in the 11th century.

A great deal of social coordination is only achievable when based on the truth. But many of the relevant truths behind people’s opportunity costs and values are only known to the individuals involved. That is why voluntary arrangements in markets, in which you tell the truth about the relevant relative scarcities both when you buy and when you sell, are indispensable to all participants’ well-being.

In contrast, when governments displace voluntary arrangements with coercive impositions, lies displace truth in two ways. Not only is the competition to get political power based largely on misrepresentations, but government’s coercive impositions also replace the truth revealed in voluntary market behavior with lies. What is the effect on society? It isn’t pretty. And even though it is an essential aspect of government intrusion into citizens’ affairs, not a single moral or ethical system endorses lying. Lies will not set you free. Not only does the truth set us free, but freedom in our cooperative endeavors reveals truths we have no other way of knowing.

This is becoming more farcical every day.

US equity markets are legging higher once again following more China headlines which reiterated the same old news that was negative news over the weekend and was confirmed as a negative by Navarro… but are now positive…

Here’s the news that sparked this:

The Chinese Commerce Ministry tells us China is ready to do a deal on the parts of the negotiations both sides agree upon. The Ministry tells us they are prepared to set out a timetable for the harder issues to be worked out next year. #China #Trade

— Edward Lawrence (@EdwardLawrence) October 7, 2019

And as a reminder, Navarro said this morning that US would NOT agree to a partial deal… which is exactly what China is offering.

As @Hipster_Trader noted so accurately “So after rallying for months on hopes of a deal, markets rallying some more on hopes of a partial deal.”

 

 

If it reads like a communist manifesto, centrally-plans like a communist manifesto, and redistributes like a communist mainfesto then it is probably a communist manifesto…

None other than everyone’s favorite once-bartender, Rep. Alexandria Ocasio-Cortez (D-NY), has unveiled her manifesto for a “just society” and if you thought The Green New Deal was out there, this one will amuse and amaze.

“A just society provides a living wage, safe working conditions, and healthcare. A just society acknowledges the value of immigrants to our communities. A just society guarantees safe, comfortable, and affordable housing.

“By strengthening our social and economic foundations, we are preparing ourselves to embark on the journey to save our planet by rebuilding our economy and cultivate a just society.”

Her plan is broken down into six separate sections – all

• The Recognizing Poverty Act

• The Place to Prosper Act

• The Embrace Act

• The Mercy In Re-entry Act

• The Uplift Workers Act

• Guarantees the Economic, Social and Cultural Rights for All

“The Recognizing Poverty Act” would adjust the federal poverty level to account for regional differences, which would seem to help ‘poor’ people on the coasts more than the ‘deplorables’ in the middle of the country.

“The Place to Prosper Act” would prevent year-over-year rent increases of more than three percent.

“The Embrace Act” would allow illegal immigrants to claim the same welfare benefits as U.S. citizens and those immigrants here legally.

As a reminder, a federal public benefit is defined as: “any grant, contract, loan, professional license, or commercial license provided by an agency of the United States or by appropriated funds of the United States; and… any retirement, welfare, health, disability, public or assisted housing, post-secondary education, food assistance, unemployment benefit, or any other similar benefit for which payments or assistance are provided to an individual, household, or family eligibility unit by an agency of the United States or by appropriated funds of the United States.”

“The Mercy In Re-entry Act” ensures full access to Federal welfare benefits for all individuals with criminal convictions.

This section was followed this morning by a pair of tweets promoting “prison abolition, as AOC called for “a real conversation about decarceration [and] prison abolition in this country,” adding:

“A cage is a cage is a cage. And humans don’t belong in them.”

“The Uplift Workers Act” will adjust OMB scoring from dollar-based to “worker-friendliness” including union-membership when deciding on what entities deserve public funds.

Finally, the bill instructs the executive branch to re-initiate ratification processes for the International Covenant on Economic, Social and Cultural Rights. The ICESCR states that all persons have the right to work, fair and just conditions of work, social security, an adequate standard of living, including adequate food, clothing, housing, and healthcare.

Click here  to read AOC’s “A Just Society” manifesto.

Via S&P Global Platt’s ‘The Barrel’ blog,

A new production record for Permian basin gas, and rising transport costs for crude oil into Asia, are top of S&P Global Platts editors’ picks this week. Plus: EU renewables output, Egypt’s return to abundant natural gas supply, a US power price spike, and the squeeze on European steel mill margins.

1. Gas pipeline start-up helps Permian output to new highs

What’s happening? Gas production in the Permian Basin of West Texas edged up to a record high in late September, rising to nearly 9.5 Bcf/d, following the startup of Kinder Morgan’s Gulf Coast Express Pipeline. The 2 Bcf/d intrastate pipeline, which is designed to move associated gas production from the US’ most prolific shale play to the Texas Gulf Coast, entered commercial service about one week ahead of schedule on September 25. In October, Permian production has backed off to about 9 Bcf/d, but is still outpacing output levels that averaged less than 8.8 Bcf/d prior to the pipeline’s startup. Gas prices in the Permian Basin have come under significant pressure in recent days as incremental production floods the West Texas market. On September 27, cash prices at the Waha hub fell nearly 50 cents in intraday trade, tumbling to $1.02/MMBtu, before settling around $1.20/MMBtu.

What’s next? Weaker shoulder season demand is likely to drive additional price volatility at Waha this month and into November. In recent trading, the balance-of-month October forward price at Waha fell to $1.06/MMBtu, down from over $1.60/MMBtu just last week.

2. Crude oil transport costs shoot up on US sanctions

What’s happening? Global tanker freight rates continued to soar last week, with costs for US tankers bound for Asia hitting all-time highs, after US sanctions on two shipping entities of China’s transport giant COSCO fueled concerns over tanker availability and the cost of transporting oil. COSCO, which is accused of breaking US sanctions on Iranian oil exports, shipping unit operates more than 100 tankers including VLCCs, suezmaxes, aframaxes and panamaxes. The cost of taking a VLCC, which normally carries 2 million barrels, from the US to China hit a record $10 million this week as a result.

What’s next?  Due to the rising cost of tanker transport, crude buyers will continue to look for supplies from closer, regional alternatives – a trend that already hitting regional arbitrage economics and denting demand for specific crude grades. On October 3, ICE Brent futures’ premium over Dubai crude slipped below a key $3/b inflexion point for the first time since August, with the arbitrage for North Sea light crude to Asia curbed by the surge in freight costs.

3. Europe’s green power generation keeps rising

What’s happening? Combined wind and solar generation across Europe’s Big Five power markets (Germany, France, Spain, Italy, GB) is up 11% year on year. The green energy produced to end-September is equivalent to Europe’s total steam coal imports in 2018. Over the summer cheap gas and strong renewables kept a lid on power prices and allowed below-normal hydro reservoir stocks to be preserved for more lucrative winter price period.

What’s next? To date German onshore wind has been the single most disruptive source of green power in Europe. As German onshore additions slow, offshore wind is the new force to be reckoned with. The last turbine has just been installed at the 1.2 GW Hornsea One facility in UK North Sea waters, the world’s largest to date. With a 50% load factor, each megawatt is going to punch well above its weight versus onshore wind and solar, with Hornsea producing enough power for a million households.

4. Changing fortunes of Egypt’s gas sector

What’s happening? Egyptian gas production has been rising quickly over the past two years, buoyed mostly by the startup of the supergiant Zohr field operated by Italy’s Eni. The country is again a net exporter of gas as production growth has outpaced demand growth.

What’s next? Egypt has resumed large-scale LNG exports from the Idku plant and plans to restart LNG supplies from the Damietta plant by the end of 2019. Egypt is also set to begin to import Israeli pipeline gas from 2020  – mostly for domestic use, but potentially to add to its growing surplus of gas for export as LNG.

5. Extreme weather creates volatility in US power markets

What’s happening? Unseasonably warm US Mid-Atlantic weather with temperatures above 90 degrees Fahrenheit resulted in PJM Interconnection under-forecasting load by roughly 5 GW on October 1, which triggered a reserve event and shortage pricing that drove real-time power prices above $4,000/MWh. Oil-fired resources quickly ramped up in response. The following day, PJM issued its first demand response action in five years as the heat continued, calling on customers to reduce consumption. Preliminary peak load over 126,000 MW would be the second-highest October demand total for the PJM footprint on record.

What’s next? Continued erratic weather could lead to more supply/demand and pricing volatility in US power markets.

6. Europe’s steel mills see scant relief from lower input prices

What’s happening? European hot-rolled coil (HRC) steel spreads in the third quarter remain weak, taking into account lower regional HRC steel prices and declines in coking coal and ferrous scrap, analysis by S&P Global Platts shows. Steel to raw materials spreads were largely flat in Q3 from the low in Q2, and much weaker than in Q1 2019 or 2018 and 2017. The Northwest Europe HRC to raw materials spread averaged at Eur251.40/mt ($276.54/mt) in September, based on Platts’ calculations. For Q3, the indicative margins averaged Eur235.75/mt, from Eur229/mt in Q2. The dip in steel spreads over the past six months continues to press steel mills to cut costs and reduce marginal steelmaking, to minimize raw materials purchases and higher-grade feedstocks as productivity falls, according to market sources.

What’s next? Mills are looking for further cost cuts, and capacity adjustments to meet underlying weak steel demand are being implemented. Higher regional steel prices are likely to be the catalyst for higher European steel to raw materials spreads and steelmaking profits, as coking coal and iron ore spot prices remain better supported by demand in China, which grew this year to a new high.