Goodbye 2018

2018 was a slog, and the more I mention this to friends, the more I realize a lot of other people feel the same way. It wasn’t a bad or terrible year for us, but at the same time nothing came easy. Anything we tried to accomplish came with all sorts of unexpected pitfalls and hurdles, and in many cases success seemed hopeless until the very last moment when things finally came together reasonably well. Stuff that had to get done got done, but not without struggle and headache.

The highlight of the year was the birth of our third child, something that will forever color 2018 positively despite other challenges. Although I knew three kids in three years would be tough, the reality of the situation has been more difficult than I imagined.I forgot just how constantly attached to a newborn a mother is, a reality that’s left me largely in charge of the toddlers.

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Franklin Graham: Facebook Ban Felt Like A “Personal Attack”

Evangelist Franklin Graham on Sunday accused Facebook of issuing a “personal attack” against him by banning his account for 24 hours last week over the contents of a 2016 post, according to the Hill.

“Why are they going back to 2016,” Graham, the son of evangelical pastor Billy Graham and president of the evangelism organization Samaritan’s Purse and the Billy Graham Evangelistic Association, said during an interview on Fox News. “I think it was just really a personal attack toward me.”

Graham appeared on Fox and Friends to discuss the ban, where he said that the “problem with Facebook is that…if you disagree with their position on sexual orientation you can be classified as hate speech.”

The post in question referenced Bruce Springsteen’s decision to skip a concert in North Carolina to protest the state’s now-infamous “bathroom bill”.

Read the text of the post below:

“He says the NC law #HB2 to prevent men from being able to use women’s restrooms and locker rooms is going ‘backwards instead of forwards,'” Graham said in reference to the singer in the post. “Well, to be honest, we need to go back! Back to God. Back to respecting and honoring His commands.”

“The Bible is truth and I would hope [Facebook] would look to the Bible and get some instruction from God’s word.”

Facebook has apologized to Graham and explained that he was mistakenly banned after the post was flagged by another user, citing a policy against using “dehumanizing language” and discrimination based on sexual orientation or race. 

Graham thanked Facebook for its apology and for its decision to admit that his post didn’t actually violate their community standards.

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From ‘Goldilocks’ To ‘Oh God’ – Equities In 2018 Were A Pandora’s Box

Authored by Peter Garnry via Saxo Bank,

This past year was one long roller-coaster ride for equities with the highs and the lows punctuated by a mishmash of mixed messages, misinterpreted signals and even – wait for it – what could be a gargantuan policy misstep.

As planets orbiting stars, financial markets have gone full circle from a year ago. The headlines of late 2017 and early 2018 headlines were replete with bullish noises about how great the economy had become and how animal spirits had been let loose. From early November 2017 to late January 2018 the S&P 500 gained around 11% as logic was left outside in the cold. We didn’t buy the hype and our Q1 2018 Equity Outlook was coined “The most important year since 2008” and our main point was:

“For Q1 we acknowledge the strong price momentum and upbeat expectations together with what will likely become a strong earnings season reflecting past events. This is causing us to believe equities can push higher very short-term but that in the second half of Q1 macro data will begin to disappoint against expectations causing an equity correction above 7%, something we have not seen since Brexit.” (Q1 2018 Quarterly Outlook)

The word “synchronous” was the buzzword of 2018 as Quartz so eloquently put in on 31 January 2018. While S&P 500 was already down 1.7% from the peak the editors of Quartz had likely not anticipated the next event.

In the first seven days of February the US equity market plunged 10.3% reminding everyone that markets are not and have never been normal. They may be what the Polish-born polymath Benoit Mandelbrot calls “wild randomness” following a Lorentz distribution which is a headache because this distribution has no modes such as mean and variance. At any time, one new observation can arrive and change the whole picture.

On 6 February 2018 the front-end VIX futures made a sigma 21 move which was three times the daily move the day after the Brexit referendum, itself at that time the biggest single-day move since March 2004. The violent move caused a 93% single-day drop in the XIV (short VIX future ETN) and the ETN provider Credit Suisse later liquidated the fund. Because of the catastrophic February, the XIV had delivered 566% in return since February 2016, which had attracted all sorts of investors betting on short volatility strategies; essentially it was the most crowded trade on Wall Street.

So 2018 started crazily with the best January in decades and then swung into mayhem in February. What came next was even more surprising. The US equity market came back with lightning speed, erasing more than half of the losses and looked solid until mid-March when the market sold off again, touching the lows from February. Panic was in the air, but things stabilised and US equities managed to stage a new all-time-high in September despite growing tensions between the US and China over trade, intellectual property rights and market access. Investors had become used to Trump’s wild temperament on Twitter and were paying him less attention. Strong earnings growth and a confident Fed were bolstering sentiment.

However, under the surface cracks were spreading in emerging markets as China’s equities slipped into bear market territory and the stronger USD and oil price hammered the consumer in emerging markets.

Europe was going nowhere and saw its leading indicators getting worse and worse on top of a financial sector that was looking very fragile.

Then came the now famous words “a long way” from the Fed Chairman Jerome Powell on 3 October 2018. While many factors obviously played a role in the following months this stands as one of the catalysts. Literally the day after equities sold off and interest rates went higher.

Sentiment accelerated to the downside taking down the S&P 500 by 10.7% at the low point. Trump’s aggressive stance against China also played its part in souring sentiment. After much volatility and nervousness over the US-China relationship investors got in late November what we thought were early Christmas presents as Powell flipped on his earlier remarks and the G20 meeting looked like a road to a deal between US-China.

A few days into December a lot of questions were flying around about what was actually agreed between the US and China at the G20 meeting. It seemed from the two countries’ statements that they had different views. That kick-started renewed nervousness and new leading indicators were sending worse and worse signals on the market. Credit was deteriorating, housing was clearly slowing, stocks in cyclical industries were being slammed and the Fed Funds Futures were beginning to price an increasing likelihood of a no-rate hike decision on 19 December 2018.

However, the Federal Open Market Committee meeting in December turned out to be historic as it’s likely that the Fed made a policy mistake. Investors were not pleased about two things: 1) The autopilot on quantitative tightening, and 2) the high weight on economic data/models.

QT is currently on autopilot, which the Fed chairman noted was sensible, but it’s withdrawing $50bn of liquidity from the financial system every month. To make things worse, this monetary tightening of the balance sheet will coincide with the US budget deficit becoming bigger in 2019 creating an ugly supply/demand situation for US Treasuries. In the press conference the Fed Chairman constantly talked about economic indicators such as GDP, employment, fixed investment etc., but all these economic indicators are either lagging or coincident.

We would argue that late into a business cycle a central bank should put more weight on market signals than coincident economic indicators. The financialisation of our economy also means that the feedback loop from markets into the economy is larger than ever and as a result, ignoring market signals 10 years into an expansion might be an almighty policy mistake that the Fed will regret in 2019.

The reaction was swift with US equities extending their declines being down 6% for the year as of 21 December 2018.

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Here’s How Congress Can End The Shutdown As It Enters Its 10th Day

As the partial government shutdown enters its 10th day – half as long as the longest shutdown ever, a divided Congress is still at an impasse with President Trump, who is demanding $5 billion for his southern border wall. 

As Bloomberg‘s Erik Wasson notes, there are three ways the shutdown can go: “Trump gives up the $5 billion he wants for the wall, Democrats give Trump his wall money, or both sides come up with a face-saving deal.

And how would a face-saving deal look? Likely House Speaker Nancy Pelosi claims that the Democrat-majority house will pass legislation to fund affected federal agencies as soon as she assumes control on Jan. 3 – a plan which is not expected to contain any funding for the wall. 

Senate Republicans have vowed not to vote on any bill that Trump opposes – however Moderate republicans may pressure Majority Leader mitch McConnell to put the House proposal on the floor for amendments. Congress – with the aid of moderate GOP, could back a bill to reopen the government and possibly override a Trump veto. 

According to Bloomberg, here are some of the possible face-saving scenarios. 

Democrats Win

Pelosi and Senate Minority Leader Chuck Schumer offered options to Trump during a heated Oval Office meeting on Dec. 11, including a six-bill spending package with a stopgap for Homeland Security and a full-year stopgap spending bill for all the closed federal departments. A House Democratic aide said the most likely is the six-bill package based on bipartisan draft Senate spending bills. It would give new spending totals through September for the departments of Agriculture, Interior, Transportation, Housing and Urban Development, Treasury, State, Commerce and Justice, as well as related agencies. Under the second option, funding would stay at current levels through September with some negotiated exceptions, such as adding aid for hurricane and wildfire relief.

Trump is dug in and isn’t likely to accept either option. Both would provide $1.3 billion for border security, though it couldn’t be used for new fencing.

Stopgap Spending Into February

A stopgap bill opening the government through Feb. 8 passed the Senate on a voice vote earlier this month before being scuttled in the House by outgoing Speaker Paul Ryan and the threat of a veto from Trump. As the pain of the federal shutdown increases and workers miss their Jan. 11 paychecks, this option could become more attractive. Lawmakers could also keep current spending levels into March or later.

Senate Compromise Revived

Lawmakers could revive a deal reached in August by Senate Appropriations Chairman Richard Shelby and top committee Democrat Patrick Leahy to provide $1.6 billion for border barriers, including about 65 miles (105 km) of pedestrian fencing near the Rio Grande River. “I think $1.6 billion has a nice ring to it,” said outgoing Senate Majority Whip John Cornyn just prior to the shutdown.

“A lot of people in retrospect will say we should have accepted that,” Leahy told reporters on Dec. 19. The money could have been used only to build existing designs such as steel bollard fencing, and the barriers couldn’t be built in the Santa Ana National Wildlife Refuge in Texas along the banks of the Rio Grande. This plan would let Trump claim the shutdown gained $300 million more in funding for border security than Democrats’ $1.3 billion offer.

Pence Offer Tweaked

Vice President Mike Pence told Schumer on Dec. 22 that Trump could accept $2.1 billion for border barriers, plus a $400 million flexible fund for the president’s “immigration priorities.” Democrats dismissed the $400 million as a “slush fund” that could be used to mistreat migrants, and they called the offer hollow because Trump hadn’t publicly endorsed it.

Still, this offer could become the seed for a deal if Trump endorsed it. Language could be added to limit the money to barriers that Trump could call a wall and Democrats could call a fence. Limits on the $400 million could direct the money to mutually agreeable uses. Trump met with Pence, White House budget director Mick Mulvaney and senior adviser Jared Kushner Friday night at Pence’s residence for about two hours.

McConnell, prior to the shutdown, offered Democrats a deal allocating $1.6 billion for border barriers plus $1 billion for a flexible fund. A compromise could be reached by shrinking or eliminating the flexible fund and providing between $1.6 billion and $2.1 billion for barriers.

Grand Bargain

Trump Wins

The name of the game in shutdown fights is avoiding blame. Trump said in the widely televised Oval Office meeting on Dec. 11 that he would accept blame for any shutdown, but since it began, he’s insisted that Democrats are at fault. On Sunday, he tweeted about a “SchumerShutdown.” Democrats are in no mood to give in, making a capitulation to Trump the least likely scenario.

Slightly less implausible: Shelby floated a compromise in which Trump’s $5 billion would be split into $2.5 billion for each of two years. Trump was said to privately back the idea, but Democrats rejected it because the money could be used for a concrete wall. Because Pence’s Dec. 22 offer was lower than the $2.5 billion level, returning to this solution seems unlikely.

On CBS’s “Face the Nation” on Sunday, Shelby urged both sides to stop the blame game and said Democrats should articulate what kind of border security they can support. Montana Democrat Jon Tester, on the same program, said he prefers technology and more manpower at the border to a wall. –Bloomberg 

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The Crisis Of Capital

Authored by Charles Hugh Smith via OfTwoMinds blog,

These three dynamics render capital increasingly vulnerable to catastrophic losses as backstops and distorted markets fail.

The undeniable reality of the 21st century economy is that capital has gained while labor has stagnated. While various critics quibbled about his methodology, Thomas Piketty’s core finding–that capital expanded faster than GDP and wages/salaries (i.e. earned income from labor)–is visible in these charts.

Real wages have gone nowhere for decades. Only the top 5% of wage earners have outpaced inflation’s erosion of the purchasing power of their earnings.

Household net worth has soared $60 billion while GDP expanded by $9 trillion.Compare the relative growth trajectories of the economy and net worth of assets. Clearly, capital has expanded at rates far above the expansion rate of the economy.

Assets (capital) have exploded higher while real-world inflation (including wages) has remained in line with GDP growth: modest at best.

Courtesy of Lance Roberts and Real Investment Advice, here is a chart of total leverage and the S&P 500 stock index. Leverage / debt hasn’t pushed wages higher, but it’s certainly pushed stock valuations to the moon.

While labor / earned income is clearly in a systemic crisis, so too is capital, though it may seem as if capital is far from danger.

Capital’s crisis has several sources. One is the financial system, from pension funds to passive index-fund investors to hedge funds to government tax revenue projections, has become dependent on outsized capital gains for its stability.

Any extended period of low growth rates for capital or–perish the thought, sustained losses– will destabilize every financial structure that is counting on a projection of current returns far into the future.

A second crisis is brewing as central bank-goosed risk-on assets become too risky to hold. Risk-on assets include stocks, high-yield bonds, real estate and leveraged derivatives such as futures. Over the past decade, central banks effectively pushed capital into these risk assets by reducing the return on safe havens such as government bonds to near-zero.

To qualm capital’s fears of the risks embedded in such asset classes, central banks established a floor under these assets, the so-called Fed put: should these assets start declining, central banks implicitly promised to open the flood gates of liquidity and start buying these assets directly to shore up markets and restart the upward ascent of valuations.

Now that central banks are reducing this implicit backstop, capital is naturally becoming wary of being trapped in illiquid markets (i.e. markets where bids disappear and positions cannot be sold as buyers have vanished) and Bear Markets in which risk-on assets lose value despite the occasional sharp rally.

The third crisis is malinvestment and low returns on long-term investments: by favoring short-term gains in risk-on assets, central bank policies have created perverse incentives to buy empty commercial buildings and flats and borrow stupendous sums to fund stock buy-backs–completely unproductive uses of capital that generate zero gains in productivity, which is the ultimate source of “wealth” and widespread prosperity.

Put another way: instead of seeking moderate gains via long-term investments in new materials, new industrial processes and new efficiencies, capital has been “trained” (incentivized) to flow into speculative markets for quick gains, or into markets backstopped by central banks, rather than into productive investments that benefit the economy and citizenry.

In other words, capital should be a key source of gains in productivity that benefit everyone. Trained to seek outsized returns in backstopped (i.e. distorted) markets stripped of price discovery and quasi-monopolies defended by central states, capital has lost the appetite and the knowledge base needed to pursue long-term productive investments.

Together, these three dynamics render capital increasingly vulnerable to catastrophic losses as backstops and distorted markets fail and productive investments go begging because they can’t promise the outsized returns from speculation capital has come to expect as its birthright.

*  *  *

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Anti-ISIS Coalition Airstrikes Killed Over 1,100 Civilians

While it has been reported previously that Saudi airstrikes in Yemen have led to the deaths of over 10,000 inncoent civilians, a finding which according to Reuters suggested the US could be found guilty of war crimes for supporting the Saudi assault, it is time to shift attention to what is taking place a few hundred miles north.

The reason: U.S.-led coalition airstrikes against the Islamic State have killed over 1,000 civilians in Iraq and Syria since 2014.

In its latest monthly civilian casualty report, the Coalition detailed confirmed deaths of 1,139 civilians in airstrikes conducted since the beginning of Operation Inherent Resolve between August 2014 and November 2018, VoA reports.

“The Coalition conducted a total of 31,406 strikes between August 2014 and end of November 2018. During this period, based on information available, CJTF-OIR assesses at least 1,139 civilians have been unintentionally killed by Coalition strikes since the start of Operation Inherent Resolve,” the report read, however noting that nearly eight million Iraqis and Syrians have been liberated from IS-rule during that time (many of which have since fled to Europe thanks to Angela Merkel’s disastrous “open door” policy which was the key catalyst in spawning Europe’s populist wave).

An additional 184 reports of other unintended civilian casualties are still being evaluated.

Damascus skies erupt with surface to air missile fire as the U.S. launches an attack on Syria targeting different parts of the Syrian capital Damascus, Syria, April 14, 2018

The dramatic figures were only first revealed in July, when the Coalition admitted that 1,059 civilians had been killed in airstrikes since 2014, amid calls for updated figures from rights organizations, which have long accused the coalition of significantly undercounting the number of civilians it has killed during years of fighting against Islamic State.

 

The latest report reflects the updated total number of civilian deaths, including confirmed reports from the past six months, and comes just weeks after Trump’s dramatic announcement to withdraw US forces from Syria.

Still, even as regional forces race to position themselves for the imminent withdrawal of U.S. troops from the region, U.S. military officials caution nothing on the ground has changed yet, and on Friday, the U.S. dismissed claims Syrian forces were taking control of the northeastern city of Manbij, a key flashpoint between U.S.-backed Kurdish militias and Turkey, at the request of the Syrian Kurds.

It is unclear if the US departure will result in fewer civilian casualties or if the number will only rise should Turkey, Iran, Russia and other regional players scramble to occupy Syrian territory, potentially resulting in a far worse escalation in hostilities as what until recently was a (relatively) targeted operation morphs into a land grab free for all.

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2018 – The Year That “Russia Did It”-ism Took Over The World

Authored by Tim Black via Spiked-Online.com,

In 2018, there were few things Western elites didn’t blame on Russia…

Over the summer, Sweden’s defence commission warned that ‘a larger European conflict could start with an attack on Sweden’. Politicians and military planners clearly agreed – in June, 22,000 Swedish volunteer soldiers were called up for the largest surprise exercise since 1975.

The protagonist of this European conflict wasn’t named as such, but it didn’t need to be. Because every politician and civil servant, every pundit and broadcaster, just knows that the protagonist is Russia. Because that is the function ‘Russia’ – alongside associated dread words such as ‘Vladimir Putin’ or ‘Russian oligarchs’ – now plays in the political imagination of Western elites. It is the catch-all, go-to explanation for their travails. The assumed military demiurge of global instability. The real, albeit dark and hidden, source of populist discontent.

Yet while Russia-mania is widespread among today’s political and cultural elites, it is not uniform.

For an older, right-wing section of the Western political and media class, otherwise known as the Cold War Re-Enactment Society, Russia looms large principally as a military, quasi-imperial threat. Jim Mattis, the former US marine and general, and now US defence secretary, said Russia was responsible for ‘the biggest attack [on the world order] since World War Two’. Whether this is true or not is beside the point. What matters is that Russia appears as a military aggressor. What matters is that Russia’s actions in Ukraine – which were arguably a defensive reaction to NATO and the EU’s expansion into Russia’s traditional ally – are grasped as an act of territorial aggrandisement. What matters is that Russia’s military operations in Syria – which, again, were arguably a pragmatic intervention to stabilise the West-stoked chaos – are rendered as an expression of imperial aggression. What matters is that Russian state involvement in the poisoning of the Skripals in Salisbury – which, given its failure, proved Russian incompetence – is presented as ‘part of a pattern of Russian aggression against Europe and its near neighbours, from the western Balkans to the Middle East’, to quote Theresa May.

And it matters because, if Russia is dressed up as the West’s old Cold War adversary, just with a new McMafia logo, then the crumbling, illegitimate and increasingly pointless postwar institutions through which Western elites have long ordered the world, suddenly look just that little bit more solid, legitimate and purposeful. And none more so than NATO.

This is why NATO has this year been accompanying its statements warning Russia to ‘stop its reckless pattern of behaviour’ with some of the largest military exercises since the fall of the Berlin Wall nearly three decades ago. Including one in November in Norway, involving 50,000 troops, 10,000 vehicles, 250 aircraft and 60 warships.

Then there is the newer form of Russia-mania. This has emerged from within the political and cultural elite that came to power after the Cold War, ploughing an uninspiring third way between the seeming extremes of the 20th century’s great ideologies. Broadly social democratic in sentiment, and elitist and aloof in practice, this band of merry technocrats and their middle-class supporters have found in ‘Russia’ a way to avoid having to face up to what the populist revolt reveals – that the majority of Western citizens share neither their worldview nor their wealth. Instead, they use ‘Russia’ to displace the people as the source of discontent and political revolt.

We have seen this play out in the US in the continuing obsession, fronted by Troll-Finder General Robert Mueller, over alleged Russian meddling in the 2016 US presidential election. And the same obsession has emerged in the UK, too, with politicians and pundits claiming that a shadowy network of Russian influence tipped the EU referendum in favour of Leave.

It is never quite clear how the ‘Russians’ or ‘Putin’ did all this, beyond Facebook ads and decidedly dubious talk of so-called dark money. But then clarity is not the point for this stripe of Russia-maniac. He or she simply wants to believe that Trump or Brexit were not what they were. Not expressions of popular will. Not manifestations of popular discontent. Not democratic exercises.

No, they were the result, as one Tory MP put it, of ‘the covert and overt forms of malign influence used by Moscow’.

Or, in the words of an Observer columnist, ‘a campaign that purported to be for the “left behind” was organised and funded by men with links across the global network of far-right American demagogues and kleptomaniac dictators such as Putin’.

Such has been the determination to blame ‘Russia’ or ‘Putin’ for the political class’s struggles, that in August Tom Watson, Labour’s conspiracy-theory-peddling deputy leader, called for a public inquiry into an alleged Russian Brexit plot. ‘[Voters] need to know whether that referendum was stolen or not’, he said.

Such a call ought to be mocked. After all, it is absurd to think ‘Russia’, ‘Putin’ and the trolls are the power behind every populist throne. But the claims aren’t mocked – they’re taken as calls to action. Think of anything viewed as a threat to our quaking political and cultural elites in the West, and you can bet your bottom ruble that some state agency or columnist is busy identifying Putin or one of his legion of bots and trolls as the source. The gilet jaunes protests in France? Check. Climate change? Check. Italy’s Five Star Movement? Check.

And all this from a nation with a GDP equivalent to Spain, an ageing, declining population, and a failing infrastructure. The reality of Russia is not that of a global threat, but of a struggling state. Russia is weak. Yet in the minds of those clinging desperately to the status quo, ‘Russia’ has never been more powerful.

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Elizabeth Warren Announces Plans For Presidential Run

In a video announcement and email to supporters sent Monday morning, Massachusetts Sen. Elizabeth Warren announced that she was officially launching an exploratory committee to seek the 2020 Democratic nomination, making her the first candidate to officially announce in what’s expected to be a “long and crowded” primary, according to the New York Times.

In her video, Warren leaned on the anti-Wall Street themes that have become a hallmark of her political career since she was elected to the Senate in 2013 after defeating moderate Republican incumbent Scott Brown. Prior to that, she had been a bankruptcy law professor at Harvard.

“I’ve spent my career getting to the bottom of why America’s promise works for some families, but others, who work just as hard, slip through the cracks into disaster,” she said in the video. “And what I’ve found is terrifying: these aren’t cracks families are falling into, they’re traps. America’s middle class is under attack.”

“But this dark path doesn’t have to be our future,” she continued. “We can make our democracy work for all of us. We can make our economy work for all of us.”

Watch the video below:

Warren’s announcement comes after reports surfaced over the weekend that she and a handful of other prominent contenders woud likely announce by the end of January.

The race for the 2020 nomination is expected to be the most wide open for Democrats since 1992. Oddly enough, the most popular candidates according to public opinion polls are Joe Biden and Bernie Sanders, both of whom are still debating whether to run because of their advanced age.

By forming the committee, Warren can begin filling key staff roles and raising money for her primary bid. More than three dozen Democratic senators, governors, mayors and business leaders are also weighing bids

 

 

 

 

 

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Murky 2019 In Store For US Economy Thanks To Fed’s Monetary Policy

Authored by Brandon Smith via Alt-Market.com,

December 19 marked the day the Fed may have decided it’s going “all in” on the idea of a “strong U.S. economy.”

The Fed locked in an increase of the Federal Funds Rate from 2.25% to 2.40%, and it will increase the primary credit rate to a full 3.00%. These December increases were pretty much anticipated back in early November.

The increases came in spite of commentary by Jeffrey Gundlach from Doubleline, who said the Fed shouldn’t have raised rates:

“I don’t think they should… The bond market is saying there’s no way the Fed should be raising interest rates.”

From here on out, things get murky, and that uncertainty could very well set the tone for 2019.

Let’s start with the Fed’s now-infamous “dot plot,” below (sourced from their December projections document):

As you can see in the “dot plot” above, chances are Federal Fund rates will be soaring over 3 percent in 2019. In 2020, there is still a good chance rates will soar even higher, nearing 3.75 percent. It also looks as though rates will stay at or above 3 percent for the foreseeable future.

That means credit is about to get (and stay) more expensive. Growth is likely to slow down, and the cost of commodities could rise dramatically.

In fact, according to the Bureau of Labor and Statistics, food and most energy prices are already on the rise (emphasis ours):

“Food prices increased 1.4 percent for the year ended November 2018. Prices for food at home increased 0.4 percent, while prices for food away from home rose 2.6 percent. In November 2018, prices for cereals and bakery products rose 1.3 percent, the largest 12-month increase among the six grocery store food groups.

Within energy, gasoline prices rose 5.0 percent for the 12 months ending November 2018, and fuel oil prices increased 16.1 percent. Electricity prices increased 0.6 percent and natural gas prices declined 2.1 percent.”

But according to the Fed’s December statement, things are “roughly balanced.” If this is “balanced”, it would be interesting to see what the Fed considers out of balance.

It seems like Fed Chairman Jerome Powell hopes that people will just take his “spoonful of sugar” to help this bad tasting economic medicine go down.

The “Poison Pill”: Real Inflation and QE Unwind

The Fed, and the U.S. Government in general, doesn’t like to report real inflation. They report CPI inflation at 2.2%, which is missing energy and food costs (see chart).

As you can see in the “adjusted” chart, inflation jumped right after the 2008 financial crisis, and then again in 2016.

The Fed likes to create the illusion that 2% is somehow an ideal target. They call it their “symmetric objective rate.”

According to the Fed, so long as this target is “out there” and decisions are being made according to it, inflation will magically stay in line.

But when we examine real inflation with food and energy costs factored in, we see a completely different picture (see BLS chart below):

As you can see, real inflation was still trending upwards to the end of November 2018. We’re getting dangerously close to levels of inflation not seen since 2011. And with the cost of commodities already going up, it doesn’t look good.

Obviously the trend could change, like it did in November 2006 before spiking over 5% during the last financial crisis. Ultimately, no one really knows how this will play out, no matter how Chairman Powell spins it. Although Jim Cramer might have an idea (emphasis ours):

“Let me put it very simply: Powell wants a slower economy than we have. He wants one that hurts Main Street… He has his reasons, but please, don’t go into denial here. The Fed is perfectly happy to gradually strangle … the U.S. economy in order to stamp out inflation.”

And speaking of spin, all of that money the Fed printed up during its Quantitative Easing (QE) phase is being shed off in a plan that started back in late 2017. Powell calls it “balance sheet normalization,” except the balance sheet appears anything but normal.

The money being unwound has to go somewhere, and a chart from ZeroHedge paints another murky picture:

As you can see, the Fed’s holdings (bottom graph) from unwinding their QE program don’t look so good. When the “piper has to be paid,” who knows what will happen.

So strap in, because 2019 is going to be a murky year.

Don’t Let the Fed’s Murky Plans Leave Your Retirement “Dead”

Wolf Richter explained the Fed’s stated objective well, and linked to their first “stability report”:

“Preventing another financial crisis – or “promoting financial stability,” as the Federal Reserve Board of Governors calls it – isn’t the new third mandate of the Fed, but a “key element” in meeting its dual mandate of full employment and price stability, according to the Fed’s first Financial Stability Report.”

If their objective is full employment and price stability, then they have a lot of work to do to ensure 2019 doesn’t make things worse.

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Trump Fires Back At Kelly: A Concrete Wall Was “Never Abandoned”

Leaving amid an acrimonious battle over funding for President Trump’s border wall, Chief of Staff John Kelly revealed during a candid exit interview that Trump’s promised ‘border wall’ isn’t actually a wall. In fact, the words ‘barrier’ or ‘fence’ would probably be more appropriate, as we pointed out.

“To be honest, it’s not a wall,” said Kelly – who embarked in early 2017 on seeking advice from those who “actually secure the border,” on what to do. Speaking with Customs and Border Protection agents – referred to by Kelly as “salt-of-the-earth, Joe-Six-Pack folks,” the outgoing Chief of Staff recounts “They said, ‘Well we need a physical barrier in certain places, we need technology across the board, and we need more people’.”

“The president still says ‘wall’ — oftentimes frankly he’ll say ‘barrier’ or ‘fencing,’ now he’s tended toward steel slats. But we left a solid concrete wall early on in the administration, when we asked people what they needed and where they needed it.”

President Trump was unsurprisingly less than pleased to hear Kelly once again publicly question the president’s dedication to building a wall, and in a Monday morning tweet, Trump contradicted Kelly’s assertion that plans for a concrete border wall had been abandoned during the early days of the administration after consulting with CBP agents. Instead, Trump insisted that “some sections” of the wall would be made of concrete, while other portions would be “see through” in accordance with the wishes of border patrol experts.

“An all concrete Wall was NEVER ABANDONED, as has been reported by the media. Some areas will be all concrete but the experts at Border Patrol prefer a Wall that is see through (thereby making it possible to see what is happening on both sides). Makes sense to me!”

The tweet didn’t mention Kelly by name, but Trump’s dissatisfaction with his former chief of staff’s decision to break with the party line was obvious to all. Though whether Trump will succeed in securing funding to start construction remains to be seen, as the partial government shutdown provoked by his funding battle with Democrats enters its tenth day, halfway to tying the longest shutdown ever.

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