Tag: finance

Crispin Odey: I Haven’t Witnessed Anything Like This Since The 1970s

By now everyone has seen some version of this chart: it shows that from a record expansion of over $2 trillion in central bank balance sheets in 2017, the incremental liquidity created by the world’s central banks will hit 0 some time in early 2019, at which point it will turn negative for the first time since the financial crisis, as central banks begin the highly deflationary process of monetary destruction.

This process, also known as the transition from Quantitative Easing to Quantiative Tightening, prompted a remarkable admission from Bank of America, which confirmed all we had said since 2009, namely that without central banks, the global stock market would be trading at a fraction of its current value. This is what Bank of America’s Hans Mikkelsen said last week, when discussing “the road from QE to QT.”

While QE was wonderful and led to favorable technicals in the form of too much money chasing too few bonds, QT (quantitative tightening) is the opposite – i.e. leads to unfavorable technicals and periods of too many bonds chasing too few investors.

While QE suppressed volatility and led to a buy-the-dip mentality, QT is the opposite – i.e. higher volatility and sell-the-dip.

While under QE fundamental erosion did not matter and strategists were king, under QT companies better not disappoint and analysts are king.

This “QT” flow reversal is shown in the chart below:

Which brings us to the question asked in the latest Odey Investor Letter.

But first a brief performance update from Crispin Odey, whose International Fund just had its best month since December 2014.

Unfortunately, for the uber permabear, February’s outperformance is too little too fast, and nothing short of a complete market crash could possibly redeem the fund which has lost an unprecedented, 11%, 41% and 21% in 2015, 2016 and 2017.  Ironically, it is a crash which not even Odey appears confident will happen because as he writes, “If the pain [in the market] is too great, we go back to the monetisation.”

That is hardly controversial. The question is what happens next, and it is here that Odey may be able to generate some alpha based on his outlook for the post-crash economy and markets. Here’s what he thinks will happen after central banks return with even more QE after the next market crash:

… this time, with full employment and continual Keynesian expansionary measures, there is only one result: higher inflation and ultimately higher interest rates. Then the debt does matter, the authorities will be slow to put up interest rates and the world will witness its first taste of stagflation in fifty years. As Brian Marber said, ‘Experience doesn’t count because you never quite have enough of it.’ No one can remember Brian.

In other words, whereas in the past the central banks could step in with more QE, the fact that the US is already pumping trillions in fiscal stimulus putting the economy on the verge of overheating, would make a return to ZIRP, or QE and/or NIRP, virtually impossible without unleashing runaway inflation at a time when growth is virtually non-existent, if not negative.

To Odey, it is unclear how the world will pull itself out by its bootstraps from that particular economic crisis, which as he notes is unlike anything he has witnessed since the 1970s:

Closing off the Mexican border, giving a massive fiscal boost on top of monetising for 18 months and following it with a few trade tariffs amounts to a massive inflationary shock. Again, I have to go back to the 1970’s to witness something similar. There the monetary expansion came through in asset prices first (the nifty fifty) and then in retail prices. My bet is that we will witness a similar few years. What I can only hope is that after 10 years in which financial alchemy handed all the keys to the mathematicians, these next few years will favour the historians, if there are any left.

He is hardly alone.

His full note below.

Manager’s commentary

‘In each of us there is a bit of a Catholic and a bit of a Protestant. For truth is catholic but the search for it is
protestant’

– W.H. Auden

‘If one tells the truth one is sure, sooner or later, to be found out.’

– Oscar Wilde

Hubris is often wrongly perceived to be unheeded pride which rightly comes before a fall, but the Greek origin of ‘hubris’ was a decision or act taken by a human, which could only be taken by a God. Importantly the decision may have been the right one, the good one, but that did not matter. In the world in which central banks have taken on the role of maintaining an equilibrium, markets are subservient to the gestalt. Remember the last bear market started in the inter-bank market, where the central banking CCTV’s were not working.

This time around, the problems are unlikely to come from the banking sector despite the fact that debt has nearly doubled since 2010. The CCTV is now happily functioning. Since 2010, central banks have given to their clients, governments, the gift of issuing effectively cash to pay for deficits and so far it has worked. Japan with a  permanent budget deficit of over 7% p.a. for 10 years has less net debt outstanding than ten years ago. No conjuring act could surpass this, and certainly not one involving the amounts of money involved. The other conjuring trick involved US dollar trade and current account deficits. Faced with increased dollar balances, EM countries tied to the US dollar, had to create local currency reserves. This was another bit of QE. However, like all such performances, the longer this goes on for, the more capital intensive it becomes.

Recently I read Daniel Ellsberg’s book on the Pentagon papers. It is a very exciting read. He was very much an insider in the Johnson administration in 1964 and involved in the US’s efforts in Vietnam. The story that he tells is that it was not just Johnson, but JFK and later Nixon all lie to the American people. At no point was the war going well. The escalation in spending which ultimately cost the world the Bretton Woods trading system, was never expected by them to win but just to prevent the US losing immediately.

You might think it had no relevance to today, but of course, it does. Keeping the world’s trading system going is the key job that central bankers feel the need to do. Ever since the central bank in New Zealand in 1989 introduced the idea of inflation targeting, central banks have felt the need to maintain full employment. From 1995 when 5 billion people were introduced into a trading system of 1.5 billion people, central banks have not had to worry about inflation. Globalisation brought deflation.

But today the cash that has been poured into the world economy demands that either globalisation continues to deflate prices and wages, or that miraculously technology intervenes, with the threat of robots, offsetting what is now a shortage of jobs which should come through in wage and price rises.

For the central banks, it does not help that Trump is more concerned about winning the midterm elections than keeping this relatively fragile equilibrium going.

Closing off the Mexican border, giving a massive fiscal boost on top of monetising for 18 months and following it with a few trade tariffs amounts to a massive inflationary shock. Again, I have to go back to the 1970’s to witness something similar. There the monetary expansion came through in asset prices first (the nifty fifty) and then in retail prices. My bet is that we will witness a similar few years. What I can only hope is that after 10 years in which financial alchemy handed all the keys to the mathematicians, these next few years will favour the historians, if there are any left.

In the Vietnam wars, despite the lies coming from government, by 1967, markets had worked out who was going to lose. The soaring budget and current account deficit put pressure on the dollar. The lies wore out LBJ who decided unexpectedly not to stand again for president. Perversely it was France, who had begun the war against Ho Chi Minh in 1946 and whose treachery in 1948 ensured that forever after it became a war of independence, in 1970 forced the USA off Bretton Woods by demanding payment in gold. Many commentators remain convinced that the Fed will end QE this year and normalise monetary policy, because it is their present intention.

When one looks at the risks involved in moving from a system which promotes growth without the need for savings to one which demands the world promptly save an additional 1.9 trillion in 2 years, those risks just remain too great. Printing money made everything work. Funding higher saving demands an increased savings rate and less income to spend. My money remains on a volte-face.

Surely there are too many memories of just what happened when something similar was attempted in 2014. By 2016 the emerging markets were dying. If the pain is too great, we go back to the monetisation. But this time, with full employment and continual Keynesian expansionary measures, there is only one result. Higher inflation and ultimately higher interest rates. Then the debt does matter, the authorities will be slow to put up interest rates and the world will witness its first taste of stagflation in fifty years. As Brian Marber said, ‘Experience doesn’t count because you never quite have enough of it.’ No one can remember Brian.

 

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Stocks Spike As 11 Russian Warships Reportedly Leave Syrian Waters

US equity markets are re-surging following headlines that satellite images show eleven Russian battleships leaving a port in Syria, potentially reducing the immediate fears of a proxy war becoming a world war.

A snapshot of the port of Tartus, shows the Russian warships at anchor before, according to ISI:

And after: a single Russian submarine remains at Tartus.

More details from Fox News:

Additionally, a Russian lawmaker has confirmed that Moscow is in direct contact with US military staff for Syria.

This sent Nasdaq above yesterday’s highs as the machines ran stops.

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Putin: World Is Getting “More Chaotic”, But Hopes “Common Sense Will Prevail”

As last week’s chemical attack in Syria has (rightly or wrongly) led relations between Russia and the West to further deteriorate, Russian President Vladimir Putin said he hopes “common sense” will prevail as the modern world grows “more chaotic,” per RT.

Putin

He added that the present international situation – which has been marred not only by tensions surrounding the Syria gas attack but also the poisoning of former Russian spy Sergei Skripal – is “very troubling.”

“The state of world affairs invokes nothing but concerns, the situation in the world is becoming more chaotic,” Putin said on Wednesday during a ceremony to welcome new ambassadors to Russia.

“Nevertheless, we still hope that common sense will eventually prevail and international relations will enter a constructive course, the entire world system will become more stable and predictable.”

He added that Moscow will continue to strengthen “global and regional” security, and will honor its “international responsibilities and develop cooperation with our partners on a constructive and respectful basis.”

“We will pursue a positive, future-oriented agenda for the world; and work to ensure stable development, prosperity and the flourishing of mankind,” Putin said.

The Russian leader also revealed that he would meet with the South Korean president when he visits Russia in June, and that Russia coordinates steps on the energy market with Saudi Arabia.

Putin also said Russia doesn’t support “twitter diplomacy”, which followed a threat tweeted by President Trump in response to Russia’s claim that it would shoot down any US missiles fired at Syrian government installations.

Trump warned Russia to “get ready” because the missiles will be coming “nice and new and ‘smart!'”

But Trump quickly backpedaled and blamed the “bad blood” between the US and Russia on – guess who? – Mueller, Obama and the Democrats.

Interestingly the Ruble has strengthened since Putin spoke, erasing today’s losses…

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Is This The Moment Of Truth?

Authored by James Rickards via The Daily Reckoning,

One of the most famous passages in American literature occurs in Chapter 13 of Ernest Hemingway’s The Sun Also Rises. It takes place in a café in Pamplona, Spain during the running of the bulls.

Bill Gorton, a friend of the protagonist, Jake Barnes, has just arrived from New York. Bill is in the café talking with Mike Campbell, an upper-crust Englishman, now fallen on hard times but keeping up appearances.

In the course of telling a story about his tailor, Mike casually mentions his bankruptcy. Here’s the dialogue:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

“What brought it on?”

“Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”

Mike admits to his own helplessness; his descent into bankruptcy was apparently totally beyond his control. This reflects upon his lack of control with regards not only to his business matters, but to his life in general.

You’ve probably seen variations of the part of the passage that says, “Gradually and then suddenly.” It’s often paraphrased or misquoted as, “slowly at first, and then quickly.”

The short version of the quote is offered as a warning that a slow, steady accumulation of debt with no particular plan for repayment can continue longer than expected, and then suddenly descend into a full-blown financial distress scenario and a rapid end-state of collapse.

Ernest Hemingway was not only a Nobel-Prize winning author, but was an astute observer of human nature and a fine armchair economist. His description of going bankrupt in Chapter 13 of The Sun Also Rises is a pitch-perfect narrative of how the United States is now barreling toward a crisis of confidence in the dollar.

I selected the longer version to give the short quote some context. The debtor, Mike, didn’t just go bankrupt. He had a lot of “friends” who relied on him for his generosity and support, with no willingness to pay him back or help him in distress.

He also had a general “lack of control” with regard to his financial situation. Most debtors can see problems coming and either cut back spending or take other steps to deal with the debt. Either course will bring the situation to a head sooner than later.

It’s the lack of control that allows the debtor to reach the point of non-sustainable debt, the “gradually” part, and then have a crisis thrust on him all at once, the “suddenly” part. This is how the inevitable becomes a surprise.

Sound familiar? It should. This is exactly the situation in which the U.S. now finds itself. The U.S. national debt has been accumulating slowly for decades. There is no plan to make it sustainable; just a vague wish that the creditors will keep expanding the debt or rolling it over.

The U.S. has a lot of “friends,” both at home and abroad, who expect benefits whether in the form of entitlements, foreign aid, government contracts, or tax breaks. Clearly the U.S. Congress and White House each exhibit a complete lack of control. The café scene is complete.

The question is whether the U.S. is now at the point of “suddenly” going bankrupt. Of course, the U.S. won’t actually go bankrupt. It can print all the money it needs to pay off its debts in nominal terms. The issue then is a matter of when that kind of money printing becomes necessary, and under what conditions.

The dynamic of “gradually, and then suddenly” is well-known to physicists and applied mathematicians. In physics, it is known as a phase transition. A good example is a pot of water being boiled and then turning to steam. The flame can be applied to the pot for quite a while and absolutely nothing happens to the naked eye. Of course, the temperature is rising, but hot water looks just like cold water.

Suddenly the surface of the water becomes turbulent and quickly after that the bubbly surface bursts into steam. The water has been transformed. If nothing is done, the entire pot will evaporate.

In mathematics, the same dynamics are known as hypersynchronicity. That’s a fancy word for a lot of people suddenly all doing the same thing at the same time. A run on the bank is a perfect example.

A bank run begins with just a few people demanding cash at the teller counter (or doing the digital equivalent by withdrawing deposits or cashing out of money market funds). Soon word spreads, people panic, everyone wants their money back at once, and there’s not enough money to meet the demand for liquidity.

This is exactly what happened in September of 2008 following the bankruptcy of Lehman Brothers. That crisis had been on a slow boil since August 2007, then suddenly in September 2008 the whole world wanted its money back.

I’ve been a fan of Hemingway for decades, and have read almost every word he ever published including letters and incomplete manuscripts, as well as a number of well-researched biographies.

I’ve seen no evidence that he took much interest in physics or mathematics. Yet, there’s ample evidence that not only was Hemingway a close observer of human nature, that’s obvious from his writings, but he was also an excellent armchair economist.

Hemingway learned an enormous amount about foreign exchange, inflation and national insolvency as an expatriate reporter living and traveling in Europe in the 1920s. He saw the French hyperinflation of 1925 firsthand.

As an American with a dollar income, he could live in a decent apartment and afford the best wines in the best cafes because the French franc had drastically devalued. His dollars were a natural hedge against franc devaluation. The French themselves had to suffer the consequences of the hyperinflation because they were paid in francs not dollars.

What if the dollar suddenly became as unwanted as the French franc in 1925?

Consider the evidence that the U.S. may now be dangerously close to the “suddenly” stage of Hemingway’s bankruptcy scenario after years in the “gradually” stage:

  • Congress has enacted the Trump tax cut, which blows a $1.5 trillion hole in the budget deficit. The belief that tax cuts will stimulate enough growth to pay for themselves is a sheer fantasy shared by Larry Kudlow, Art Laffer, and very few others.

  • Congress has also removed discretionary spending caps on domestic and defense spending that have been in place since 2011. At the same time, Congress reinstated “earmarks” that allow members to spend money on pet projects. These two acts will add another $300 billion per year to the U.S. deficit.

  • Student loan defaults are now running at 20% per year and the volume of student loans exceeds $1.5 trillion, far more than the amount of junk mortgages in 2007, and with a much higher default rate. Covering these losses will add another $200 billion per year to federal deficits for years to come.

  • The U.S. debt-to-GDP ratio is now over 105%. This is well past the 90% “danger zone” identified by economists Ken Rogoff and Carmen Reinhart. Once in the danger zone further borrowing actually causes growth to decline rather than acting as a “stimulus.”

  • Russia, China, Iran, Turkey and other adversaries of the U.S. are stockpiling thousands of tons of gold as a hedge against the inflation they expect as the U.S. tries to print its way out of its non-sustainable debt.

There are many other signs that the day of reckoning on the U.S. debt situation is coming much faster than experts believe. Fiscal policy is now characterized by a complete “lack of control” as Hemingway characterized it.

Treasury financing requirements are skyrocketing. Just last week, the U.S. Treasury issued $300 billion of new debt to cover maturing debt, new obligations and interest on the debt itself.

Hemingway’s point was that bankruptcy comes much faster than anyone, especially the bankrupted himself, expects.

The U.S. is much closer to an inflection point than the Congress and the White House realize. The pot is beginning to boil. The time to hedge against the worst outcomes — with gold, silver, land, natural resource plays, and other hard assets — is now.

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US P-8 Poseidon “Submarine Killer” Headed For Syria

A highly sophisticated US Navy P-8A Poseidon maritime patrol plane, also known as a “submarine killer” was observed by the Strategic Sentinel flying south of Cyprus, having likely departed from Naval Air Station Sigonella in Italy, and headed eastward toward Syria on Tuesday.

The flight comes at a time when not a single commercial plane can be observed over Syria, as per the guidance of Europe’s Air traffic control which has warned that a airstrikes on Syria are imminent.

A recent flight path history shows the Poseidon engaged in heavy short “sniffing” designed to uncover whether any Russian subs are to be found near Syria.

Below we present some more details on the P-8 Poseidon Submarine Killer courtesy of The National Interest.

There is a decent chance you have already flown on one of the U.S. Navy’s key new aircraft—or rather, the 737 airliner it is based on. The P-8A Poseidon maritime patrol plane may not be as sexy as an F-35 stealth fighter, but in some ways it is far closer to the forefront of international flashpoints in the Pacific Ocean. Maritime patrol planes are essential for tracking the movement of ships and especially submarines across vast oceanic waters—and potentially sinking them in the event of hostilities.

Hunting submarines from the air, however, is an airpower-intensive job that requires numerous airframes spending thousands of flight hours flying long-distance patrol patterns over the ocean. Since 1962, the U.S. Navy has operated the P-3 Orion patrol plane, based on the four-engine L-88 Electra airliner. The turboprop-powered aircraft could spend a dozen hours flying low over the ocean to drop sonar buoys, scan the water for metallic hulls of submarines with its Magnetic Anomaly Detector (MAD) and potentially launch torpedoes. After fifty-five years of able service, however, the P-3s have accumulated thousands of service hours and their hulls are growing fatigued.

In 2004 the U.S. Navy selected the jet-powered Boeing P-8 Poseidon to succeed the aging P-3. Development proceeded relatively smoothly, in part due to the use of a preexisting airframe and the decision to phase in the P-8’s advanced systems in a series of increments rather than delivering them all at once. This led the P-8 unit costs to actually come in under budget, at $150 million per aircraft.

The P-8 is based on the 737-800ERX short-to-medium-range airliner. It typically has a flight crew of three and boosts stronger power generators for its onboard electronics. The Poseidon reportedly offers a much smoother ride than the Orion, thanks to its broader-swept wings and flight computers. Orion crews were often nauseated by the strong turbulence their low-altitude flight operations required.

The Poseidon’s primary payload is its diverse array of sensors. These include an APY-10 multi-mode synthetic aperture radar, which not only can track the position of ships over hundreds of miles away, but possesses a high-resolution mode which can spot submarine periscopes poking above the waves and even identify different classes of ships. An MX-20 electro-optical/infrared turret provides a shorter-range search option, while an ALQ-240 Electronic Support Measure (ESM) derived from a system onboard the EA-18G Growler functions as an electromagnetic sensor, particularly useful in tracking the positions of radar emitters.

A recent addition is the Advanced Airborne Sensor, a dual-sided AESA radar that can offer 360-degree scanning on targets on land or coastal areas, and which has potential applications as a jamming or even cyberwarfare platform.

A number of key systems on the P-8 are designed to track submerged submarines. A rotary launcher system in the rear of the P-8 can dispense sonar buoys into the water. A recent upgrade allows P-8s to employ new Multistatic Active Coherent buoys that generate multiple sonar pulses over time, allowing for greater endurance and search range. The P-8 also has its own acoustic sensor, and even a new hydrocarbon sensor that can “sniff” for fuel vapor from submarines.

However, the P-8 lacks the tail-mounted MAD sensor of the P-3 Orion, useful for detecting the metallic hulls of submarines while flying at low altitude. Various reasons have been offered for its removal: the MAD weighed too much at 3,500 pounds, it did not fit with the high-altitude search profile of the P-8, or the new sensors on the P-8 rendered it unnecessary. However, the U.S. Navy is reportedly developing a variant of the an air launched drone, called the High-Altitude Unmanned Targeting Air System, which can carry a MAD sensor and transmit its findings back up to the P-8.

Five operator stations on the port side of the plane carry multifunction displays that can be configured to display whatever sensors and controls are most useful under the circumstances. The P-8’s computers are designed to fuse the data into a single coherent picture for the operators—and can then “push” that data to friendly ships and airplanes. This is a capability the U.S. Air Force has been struggling to integrate into its new E-3G radar planes. The P-3 is also designed to be especially compatible with Navy RQ-4N drones.

In the event of hostilities, the Poseidon can carry five missiles, depth charges or torpedoes in a rotary launcher in the rear hull, and six more on underwing racks. While the P-3 had to fly low to deploy its torpedoes, the P-8 can use a special High Altitude Air Launch Accessory to transform its Mark 54 324-millimeter lightweight torpedoes into GPS-guided glide bombs that can be dropped from altitudes as high as thirty thousand feet. These shed their wings upon hitting the water and hone in on targets using onboard sonar. Poseidons can also carry Harpoon AGM-184H/K antiship missiles with a range of 150 miles.

* * *

The Poseidon entered service with the U.S. Navy’s VP-16 squadron at Kadena Air Base on Okinawa in 2013, and around fifty out of a planned 117 are now operational in U.S. service.

The type’s patrol duties have placed it at the forefront of political disputes between the United States, China and Russia.

It was already a long-established and accepted custom for countries to intercept each other’s patrol planes over international airspace. However, this becomes risky when intercepting fighters perform unsafe maneuvers as part of their efforts to intimidate the observation planes. Such antics led to a collision between a Chinese fighter and an EP-3 observation plane in 2002 with fatal results for the Chinese pilot.

On May 9, 2017, a Russian Su-27 fighter buzzed within twenty feet of a Poseidon that was patrolling the Black Sea. The P-8s in turn have practiced chasing Russian submarines. According to the Aviationist, in December 2016 Poseidons were engaged in hunting one or two carrier-hunting Oscar-class submarines in the Mediterranean. Maritime patrol aircraft are one of the few weapon systems that can routinely practice hunting their adversaries under operational conditions—stopping just short of releasing weapons, of course.

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“Jerome Is The New Janet” – Stockman Rages At The Fed’s Systematic Lies

Authored by David Stockman via Contra Corner blog,

The election of 2016 was supposed to be the most disruptive break with the status quo in modern history, if ever. On the single most important decision of his tenure, however, the Donald has lined-up check-by-jowl with Barry and Dubya, too.

That is to say, Trump’s new Fed chairman, Jerome Powell, amounts to Janet Yellen in trousers and tie. In fact, you can make it a three-part composite by adding Bernanke with a full head of hair and Greenspan sans the mumble.

The overarching point here is that the great problems plaguing American society—scarcity of good jobs, punk GDP growth, faltering productivity, raging wealth mal-distribution, massive indebtedness, egregious speculative bubbles, fiscally incontinent government—-are overwhelmingly caused by our rogue central bank. They are the fetid fruits of massive and sustained financial repression and falsification of the most import prices in all of capitalism—–the prices of money, debt, equities and other financial assets.

Moreover, the worst of it is that the Fed is overwhelmingly the province of an unelected politburo that rules by the lights of its own Keynesian groupthink and by the hypnotic power of its Big Lie. So powerful is the latter that American democracy has meekly seconded vast, open-ended power to dominate the financial markets, and therefore the warp and woof of the nation’s $19 trillion economy, to a tiny priesthood possessing neither of the usual instruments of rule.

That is to say, never before in history has a people so completely and abjectly surrendered to an occupying power—even though its ostensibly democratic government already possessed all the votes and all the guns.

So it is no exaggeration to say, therefore, that the Fed is an alien state unto itself. That was powerfully symbolized most recently by the appointment of John Williams, a lifetime apparatchik at the San Francisco Fed, to the job of head satrap at the central bank’s Liberty Street outpost in the heart of Wall Street.

In the scheme of things, the President of the New York Fed is #2 in the whole central banking apparatus, and as such is immensely more powerful than any Senate Committee Chairman or House Speaker. But Williams’ appointment was not reviewed or passed upon by a single elected official accountable to any voter anywhere in the US of A.

Yet here is an academic scribbler so out of touch with reality that he advocates raising the Fed’s inflation target to 3% because it’s purportedly good for American workers; and who for nearly 100 months also voted to keep interest rates pinned to the zero bound even though it was crushing savers and retirees.

Worse still, Williams advanced these oppressions of the people because he claims to have espied an invisible thing called “the neutral rate” of interest that no saver or borrower in America has ever seen and that no free market would ever produce. That’s because the only true interest rate is the market rate at any given moment, not the artifacts pegged by the FOMC and the imaginary “target rate” from which they are derived.

If Dr. Williams ever had to defend slashing the purchasing power of worker paychecks, transferring wealth from retirees to the banks and worshipping a tiny interest rate number that no one can see, do we think he could get elected dog catcher, even in San Francisco?

No, we do not!

To be sure, unlike the case of the 12 regional Fed presidents, 7 of the 12 members of the ruling FOMC are appointed by the President and confirmed by the Senate. But the fact is, the Big Lie is so deeply rooted in the political system—including the GOP which is supposed to be the party of free markets and sound money—-that these appointments are drawn from a narrow circle of Keynesian economists, bankers and government careerists, making the democratic review process entirely pro forma.

For crying out loud. The Donald came to Washington threatening to drain the swamp and ended up appointing to the one job that could have made a difference a crony capitalist Keynesian who was literally born and bred in the Washington DC Swamp and never left it during his entire adult life.

Needless to say, the Big Lie in question is four-fold. The central bank and its retainers and Wall Street beneficiaries claim that:

  1. the free market has a death wish and tends toward cyclical instability, recession and even depression without the guiding hand of the state and its central banking branch;

  2.  when capitalism is plodding forward on its own energy during periods of business expansion, it’s the result of the Fed’s beneficent ministrations;

  3.  when the Fed’s serial financial bubbles finally implode, the blame lies with the very speculators it enabled and financed with cheap carry trades, falling cap rates and price-keeping operations (“puts”); and

  4.  notwithstanding the occasional externally caused financial bust, the mainstreet economy is always getting stronger and more prosperous because the FOMC is deftly guiding it to just the right balance of “full-employment” (vaguely defined as +/- 4% on the U-3 unemployment rate) and “full-inflation” (precisely defined as 2.00% on the PCE deflator—after excluding food, energy and other subjectively identified price aberrations).

It is to the latter risible narrative that we turn today in rebuke of Jerome Powell’s positively deceitful speech on “The Outlook for the US Economy” recently delivered to the Economic Club of Chicago.

According to the new Janet:

At the Federal Reserve, we seek to foster a strong economy for the benefit of individuals, families, and businesses throughout our country….After what at times has been a slow recovery from the financial crisis and the Great Recession, growth has picked up. Unemployment has fallen from 10 percent at its peak in October 2009 to 4.1 percent, the lowest level in nearly two decades. Seventeen million jobs have been created in this expansion, and the monthly pace of job growth remains more than sufficient to employ new entrants to the labor force. The labor market has been strong, and my colleagues and I on the Federal Open Market Committee (FOMC) expect it to remain strong. Inflation has continued to run below the FOMC’s 2 percent objective but we expect it to move up in coming months and to stabilize around 2 percent over the medium term.

Beyond the labor market, there are other signs of economic strength. Steady income gains, rising household wealth, and elevated consumer confidence continue to support consumer spending, which accounts for about two thirds of economic output. Business investment improved markedly last year following two subpar years, and both business surveys and profit expectations point to further gains ahead. Fiscal stimulus and continued accommodative financial conditions are supporting both household spending and business investment, while strong global growth has boosted U.S. exports.

Essentially, there is not a shred of truth in the entire passage unless you want to play 6th grade games with short-term deltas in the vaunted “incoming data”.

But apply any concept of context and notion of reasonable time duration to any of the bolded assertions and you see that Powell is either a fool or so doped-up by the Keynesian Cool Aid that he speaks jabberwocky without even knowing it.

We’d like to think it’s the latter, but anyone who starts with an assessment of the US economy by citing the 17 million jobs number is actually giving Donald Trump’s daily twitter spinning a run for the money. After all, 7 million of that number consists of born again jobs that were wiped out during the deepest recession of modern times, and have only been slowly recovered during the 9 years since.

And if you want to count from the bottom (February 2010),  you will find that among the full-pay, full-time jobs in the goods-producing sector, the loss between the pre-crisis peak of 22.02 million jobs and the February 2010 bottom was 4.4 million jobs or 20% of the total.

But here’s the thing. As of last Friday’s report for March 2018, only 2.9 million or 65% of the goods-producing jobs shed during the recession have actually been recovered. The productive core of the US economy, therefore, is still 1.5 million jobs short, meaning that many of the “born again” jobs Powell was crowing about have actually been reincarnated as burger-flippers at McDonald’s and bed-pan changers in the nursing homes.

Self-evidently, what our chief monetary central planner should have noted is that even on an aggregate basis—-quality mix deterioration aside—the jobs market is not “strong”; it’s failing badly.

Thus, between the November 2007 cyclical peak and March 2018, the US economy generated only 9.9 million jobs. That amounts to only 80,000 per month and annualized growth rate of just 0.67%. By contrast, the adult civilian population grew by 24 million during the period or by 194,000 per month.

How this squares with Powell’s claim that “job growth remains more than sufficient to employ new entrants to the labor force” beats us, but that’s not even the most important point.

To wit, an economy lugging $68 trillion of debt, facing a baby boom retirement tsunami and heading fast towards fiscal bankruptcy needs a much stronger growth of labor input than 0.67% per year—when even that anemic growth rate was largely comprised of part-time, low productivity headcounts.

By comparison, from the June 1990 peak through the November 2007 pre-crisis peak (two full business cycles), the US economy generated 136,000 jobs per month (28.4 million total) representing an annual growth rate of 1.33%. That was double the post-crisis growth rate that Jerome was gumming about at the Chicago Economics Club.

And if you scroll back one more cycle to the June 1981-June 1990 Reagan/Bush expansion, job growth averaged 170,000 per month. Moreover, given the smaller size of the labor force back in the 1980s that computed to a 2.05% per year growth rate.

So rather than a “strong” labor market, what we really have is one that is failing miserably. As Jeffrey Snider so cogently pointed out after the March jobs report, there are actually 16.6 million “missing” workers. Indeed, after 24 million of population growth since November 2007, the US has generated only 5 million full-time jobs.

Actually, it’s worse when you look at the composition of even the 5 million “FT” (full time) jobs shown above. Since the day Bill Clinton shuffled out of the Oval Office (January 20, 2001), the US economy has generated only 606,000 new “Breadwinner” jobs. That is, full-time, full pay jobs with an ability to support a $50,000 per year wage.

Folks, if you want to call that “strong” you have apparently invented a new language because the trend gain computes to just 2,914 new Breadwinner jobs per month!

Stated differently, since January 2001 the US has generated just 15.4 million new jobs and 96% of them have been in the Part-Time Economy ( leisure, hospitality, retail, temps and other gig-oriented categories) or the HES Complex (health, education and social services).

That is to say, job growth has overwhelmingly been in the low pay and low-productivity employment that most definitely does not fuel the sustainable growth potential of the main street economy; and which also is heavily dependent upon the fiscal largesse of a government that is tumbling into fiscal collapse.

As they say on late night TV, however, that’s not all, and it’s not even the half of it. The Fed heads have been reduced to obsessing about the BLS’ virtually worthless jobs reports because the other economic indicators are even weaker on a trend basis.

For instance, manufacturing output is still well below its November 2007 level, and labor productivity has grown at barely 1.0% per annum, or less than half the 2.2% rate clocked between 1954 and the year 2000.

Then there is the risible point about an export recovery. From exactly what Powell did not say and here’s why: US exports simply made a round-trip during the global commodity mini-cycle from their mid-2014 highs to a bottom in the spring 2016 and then back essentially to where they started; and that’s notwithstanding the one0time 2016-2017 surge of credit-fueled demand emanating from the Red Ponz1 that accompanied the run-up to Mr. Xi’s coronation last fall.

The truth is, exports during the most recent month were almost exactly where they were 6 years ago in September 2012, and that’s not any kind of rebound!

Finally, there is the disastrous performance of the most important economic metric of all: The rate of net investment in fixed productive assets. We do not know what Jerome has been smoking to support the claim that net investment has recovered strongly, but whatever the substance, it is clearly hallucinatory.

In fact, real net business investment was still 28% below its year 2000 level as of 2016, and last year (2017) the number (which the St. Louis Fed has not yet posted) actually went down.

Call the Powell speech what you will, but we think it’s just more jabberwocky designed to rationalize an illicit central banking regime which is rotten to the core.

Needless to say, when an unelected, all-powerful arm of the state lies to the people systematically there has got to be a con job in there somewhere.

And this time even Wall Street has lost track of the scam.

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091: One of the most important issues of our time

On Monday, I shared a recording from aboard the Investor Summit at Sea, hosted by my friends, the Real Estate Guys.

This is one of the only conferences I attend each year as a speaker. And that’s because I get so much value from the other speakers and attendees – guys like Chris Martenson, Adam Taggart, Robert Kiyosaki, Peter Schiff and G. Edward Griffin.

Yesterday, I was on a panel with Peter Schiff, Chris Martenson and Adam Taggart. And I recorded the discussion for Sovereign Man readers who couldn’t be there in person.

This panel largely centered around agriculture.

As you probably know, I’ve got some experience in the industry… I took thousands of acres of bare, central Chilean land and transformed it into farmland that will soon yield one of the world’s largest blueberry and walnut crops.

But, our discussion didn’t center on my personal experiences with agriculture.

Instead, we dug into agriculture’s global supply and demand fundamentals.

200,000 people a day are coming into the world each day. And they all require food. Also, the number of calories being consumed per capita worldwide is increasing.

On top of that, as developing countries like China and India get richer, the quality of the calories they consume changes – from beans, rice and veggies to more meat (which requires far more resources to produce).

And while demand for food is soaring, arable farmland is on the decline.

This is one of the most important problems of our day. And it’s not an easily solvable one.

We also touch on geopolitical risks like water rights and the economics – and risks – of farmland investments in developing countries (another topic I know well).

A lot of folks say we won’t have a global food shortage because we can just start farming in Africa. But I’m sorry to say that’s not the solution.

It takes a tremendous amount of logistics to produce and transport food. And Africa just doesn’t have it.

In today’s difficult financial and economic climate, there’s a lot to focus on… and to be wary of.

Agriculture’s growing global supply and demand imbalance is one of the trends that certainly has my attention. But even with favorable fundamentals, just like with other asset classes, you can make some major mistakes when investing in this space.

I also closed out the panel by asking everyone what they’re doing with their own money. You’ll want to hear what these smart guys have to say.

Tune in right here…

I have to warn you, the audio quality isn’t excellent. But the content is important.

Source

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WTI/RBOB Slides After Big Surprise Crude Build, Record Production

WTI/RBOB prices are higher once again amid escalating tensions over Syria, despite dipping on a surprise build from API; but when DOE confirmed a big surprise crude build, WTI/RBOB prices slid. US crude production also rose once again to a new record high.

Bloomberg Intelligence Senior Energy Analyst Vince Piazza notes that WTI discounts to Brent of more than $5 a barrel continue to drive crude exports, helping to pull U.S. oil stockpiles down.

Skeptics would argue that crude production is rising to meet demand, fed by near-term enthusiasm for higher prices, encouraging even more output.

API

  • Crude +1.758mm  (-1.25mm exp)

  • Cushing +1.452mm (+2mm exp)

  • Gasoline +2.005mm

  • Distillates -3.849mm

DOE

  • Crude +3.306mm (-1.25mm exp)

  • Cushing +1.129mm (+2mm exp)

  • Gasoline +458k

  • Distillates -1.044mm

API’s surprise crude build was confirmed by DOE (and was even larger) and Gasoline also saw inventories build.

 

Once again US crude production is on everyone’s mind and it rose once again to a new record high…jumping 0.62% to over 10.5mm b/d

 

WTI/RBOB prices are higher, after dipping on API data last night, following further escalating rhetoric from Trump regarding Syria, and Eurocontrol, an air traffic agency in Europe, asked airlines to apply caution on flights to the eastern Mediterranean region because of possible air strikes in Syria over the next 72 hours.

But prices slid after DOE confirmed the crude build…

“We are pricing the expectation of a strike on Syria,” said Olivier Jakob, managing director of consultants Petromatrix GmbH in Zug, Switzerland.

“Then we need to reassess once it has been done to see how much of an escalation that we have.”

As a reminder, crude spiked in April 2017 when Trump fired the Tomahawks at Syria, then reversed… and then ran higher once again…

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Yelling ‘Fire’ In A Crowded Market

Authored by Nicholas Colas via DataTrekResearch.com,

Just over 2 weeks ago, there was a serious fire in the apartment building where I live. It destroyed a quarter of one floor and lasted just over an hour. Thankfully no one was injured, either among the residents or the firefighters who put out the blaze.

Regular readers know we at DataTrek are students of human nature, particularly in moments of high stress. With the benefit of a little time, I have assembled some lessons from this event. Hopefully you will find them instructive in two ways: planning for unforeseen situations, and understanding how to mitigate the effects of emotions on more prosaic endeavors like investing.

Lesson #1: Have a plan for everything. Seriously… Everything…

The fire broke out around 3am Saturday morning. My wife heard the alarms first. As I awoke I could smell a small amount of smoke. Not registering the time, I thought perhaps my neighbors had a grease fire in their kitchen. I threw on some clothes, grabbed the fire extinguisher, and opened my front door to see if I could help.

The smoke in the hallway was much worse, and my neighbors had their baby in blanket and were heading to the fire escape. Scratch the “Nick saves the day” plan. I turned back into my apartment, which was now filling with smoke at a quick rate.

We have a go-bag – I grabbed it, along with my briefcase and laptop. My wife did the same. “Open up the windows” were pretty much her only words at that point. Good idea… the smoke was getting bad. The only problem was that in the 2-3 minutes since we had awakened, the air was now unbreathable. I crawled from the windows to the front door and we walked downstairs.

Investment observation: plan for the worst-case scenario. A high-rise apartment fire is much worse than a market crash, but treat a 20% down day the same way. Plan for it. Talk through what you would do with your team. Not just in broad strokes, but discuss exactly what you want to accomplish. Sell stocks below your stops? Reallocate to equities? That’s your investment go-bag. Fill it up.

Lesson #2: Most people don’t follow Lesson #1

When we got downstairs, we saw that almost everyone was in his or her pajamas, robes and slippers. Honestly, my first thought was “I didn’t know people still wore pajamas… or robes… or slippers.” But they do. Being New Yorkers, everyone was remarkably calm. Since the building with the fire is connected into a complex of other structures, most people took shelter in one of those.

It struck me that in most buildings these people would have nowhere to go. It was about 35 degrees outside; this would have been a major problem. So as you consider similar scenarios, think about where you would go. At least carry emergency blankets like the ones marathon runners use in your go bag. I carry 4-5 to hand out, but thankfully that wasn’t necessary.

Investment observation: when market turbulence hit, understand most investors do not have a plan. That, to a large degree, is why asset prices swing around so much. Just because something is unexpected doesn’t mean it is unforeseeable. But most market participants will be caught unaware, and you need to incorporate that into your plan.

Lesson #3: Firemen have a plan

As I watched the NYFD put out the fire, I noted how they went about this very dangerous task. They don’t just blow a door open and start spraying water. They first hoisted a ladder and had a spotter climb it to assess the state of affairs. Only after some deliberation did they enter the building and get to work.

Also, they address high-rise fires with overwhelming manpower. I counted +10 trucks outside the building, and three NYFD EMT trucks parked out front. There were three gurneys with full medical equipment loaded on top staged by the front door. No matter what came out of that building, they seemed ready to treat it on the spot and get it to a hospital.

Worth noting: firemen check every apartment above the fire all the way to the roof, and this means breaking open a lot of doors. It’s all part of their process.

Investment observation: when markets become volatile you are in the crisis business more than the investment business. The fire department’s plans revolve around two goals: putting out the fire, and not getting hurt in the process. They go slowly, and they have plenty of Plan Bs/Cs/Ds. Investing during market turmoil is much the same: do the job, expect things will still go wrong, and stick to your process.

Lesson #4: Recovery takes time

Stay with me for one tangent… Many years ago, I took a trip to western Mongolia in the middle of winter to watch the local tribesmen hunt with trained golden eagles. I stayed with a family in their one room log cabin, which was heated with an old oil barrel turned into a stove. The only fuel available was the dried dung of Bactrian camels and Mongolian ponies.

That’s pretty much what our apartment smelled like once we finally got back upstairs. There is a whole cleanup industry that specializes in post-fire remediation, complete with industrial sized air scrubbers, purifiers and professional housekeepers. After four days of attention, the apartment still has a lingering odor… It will take some more time and attention to complete the task.

Investment observation: the comparison to market turmoil is obvious enough. There’s no such thing as a “V bottom” off a major low. The stink lingers for a while. Accept that.

Final Thoughts

As mentioned, no one was hurt in the fire. That, everyone will agree, is the important thing. Market crashes and/or turmoil pale in comparison to events that can harm human life.

In sharing this story I hope I have given you some food for thought about the importance of planning at home and at work. But if you have to choose one vector, make it the first.

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