Tag: finance

Authored by Mike Shedlock via MishTalk,

From 1970 to present let’s investigate how gold reacted to various interest rate environments.

A reader asked to see a chart of gold vs “real” interest rates.

Real means inflation-adjusted. To calculate the real rate I subtracted year-over-year CPI from the Fed Fund Rate.

Use of CPI as a measure of inflation is more than a bit flawed, but it is the standard measure “real”.

The price of gold is a monthly average.

No magic Rules

As one might expect, gold generally does well when real interest rates are negative as shown in the thicker blue boxes. But there is no foolproof rule.

Gold fell from $1780 to $1176 with negative real interest rates all the way.

At that time, rates were negative but they were getting less negative. However, the chart shows that gold can rise with positive real rates, and even with positive and rising real rates for shorter periods of time.

Gold vs the Dollar

Many people believe gold reacts primarily to changes in the US dollar.

Four days ago I posted Gold’s vs the US Dollar: Correlation Is Not What Most Think.

Most of the time gold is inversely correlated to the US dollar.

The problem, as the above chart shows, is that the strength of moves in gold vs the strength in moves in the US dollar are totally random.

Look at the period between 1995 and 2005. A huge jump in the dollar index yielded a relatively small decline in the price of gold.

Between 2005 and 2012 gold went on a long one-way tear up regardless of what the dollar did. The net result was a huge blast higher in gold vs the move in the US dollar index.

Various Price Points of Dollar vs Gold

That chart is from four days ago. Over the past few days, gold has blasted higher. It’s at $1513 as I type.

Gold vs Faith in Central Banks

Whatever it Takes

Neither the dollar or interest rate policy properly explains price movements in gold.

The big plunge from over $1600 to $1176 or so roughly coincides with ECB president Mario Draghi’s famous “Whatever it Takes” speech.

“The ECB is ready to do whatever it takes to preserve the Euro, and believe me it be enough,” said Draghi.

So, what do Draghi do?

Curiously, the answer is nothing other than make that statement. It was not until years later the ECB resorted to negative interest rates.

Faith in Central Banks Peaked

Looking back, Faith in Central Banks Peaked in December 2015.

Here are the events leading up to that peak.

In June of 2104, the ECB interest rate first went negative. On December 9, 2015, after a year of non-movement, the ECB unexpectedly cut rates further to -0.30.

Clearly the ECB was not in control. Dot plots of the Fed’s expected actions say the same about the Fed.

As the ECB was cutting rates, the Fed was tightening at a far slower pace than Fed’s dot plot projections.

The Fed is now on a “long term hold”.

On December 11, just after the last FOMC meeting, I noted Fed Eyes Long Pause, No Rate Hikes in 2020.’

Dot Plot Analysis – Not Hikes in 2020

Dot Plot in December 2017

The consensus opinion was interest rates would hit 3% or higher in 2020.

The Fed did not come close.

And even though real interest rates were negative, the Fed barely got going.

Recently, we had a Repo crisis followed by emergency QE although the Fed refuses to call it that.

Looking Ahead

The above chart from CME Fedwatch.

The Fed says it will stand pat, but market thinks the Fed will cut even though real interest rates are negative.

I agree with the market. The Fed’s next move will be a cut. If by some miracle it’s a hike, then a panic set of cuts will likely soon follow.

So is faith in central banks high with everything under control?

I suggest not. This rates to be a good environment for gold.

Sanctions-happy Washington continues to aid in a slow rapprochement between Russia and Ukraine. Ironically enough, at moment the US is demanding Nord Stream 2 contractors to lay down their tools and wind-down operations “immediately” or face further sanctions, there’s been an unprecedented breakthrough in the standoff between Russian state energy giant Gazprom and Kiev:

Naftogaz confirms receipt of $2.9 bn outstanding compensation from Gazprom

— Naftogaz of Ukraine (@NaftogazUkraine) December 27, 2019

Of course the other supreme irony is that Washington has claimed all along to be acting in Ukraine and Europe’s best interest, but it appears no one is getting the message. 

As we detailed earlier this week, Allseas, the Swiss company that is Nord Stream’s main contractor, confirmed its workers as well as partner contractors have laid down their tools; however, others have pressed forward as the project is very near completion, also as both Gazprom and the Nord Stream 2 project spokesman have promised to finish. Gazprom says its retrofitting its own ships to take over the bulk of pipeline laying that Allseas was overseeing. 

The WSJ reported previously that “Jens D. Mueller, a spokesman for Nord Stream 2’s parent company, said that the pipeline would be finished despite Allseas pulling out its fleet.” Additionally, Russia’s Energy Minister Alexander Novak vowed the 760-mile will be launched before the end of 2020 even after President Trump signed NS2 sanctions into effect last Friday, which target the companies laying the pipeline. 

Gazprom and five European companies are spearheading the project — among them France’s ENGIE, Austria’s OMV, the UK-Dutch Royal Dutch Shell, and Germany’s Uniper and Wintershall — which includes dozens more smaller contractors.

But now there’s less incentive for European companies and Gazprom itself to heed Washington’s warnings and stop work. As Reuters reports of Friday’s major breakthrough:

Russia’s Gazprom said on Friday it has paid Ukraine $2.9 billion to settle a legal row, part of a wider gas package deal reached last week.

Last week, Russia and Ukraine announced the terms of a new gas transit deal, under which Moscow will supply Europe for at least another five years via its former Soviet neighbour and pay a $2.9 billion settlement to Kiev to end a legal dispute.

And Kiev in exchange is set to drop a separate legal claim.

So again, as Russia and Germany continue to ignore US pressures and demands, after even some in the US administration have admitted it’s “too little too late” to block the NS2 project at this point, the unintended end result is that against all odds Russia and Ukraine could come out of this BFFs.

Authored by Max Gulker via The American Institute for Economic Research,

At first glance 2019 was a rough year for anyone in favor of an economy and society guided from the bottom up by people with the freedom to exchange, cooperate, and think as they choose. The highly visible left flank of the Democratic Party, fully embracing socialism in name and approach, erupted with proposals that would drastically change the country in ways they intend and many more in ways they do not. Meanwhile, the Republican Party’s debt from its Faustian bargain with President Donald Trump began to come due.

What can we learn from bad ideas? Plenty, if we approach them with curiosity rather than assumed intellectual or moral deficiency on the part of those trafficking in them. The truth, that people have a really hard time understanding the benefits of free markets and bottom-up organization, is both difficult and galvanizing. Free-market ideas don’t really have a place in the current incarnation of our two-party system. We’re free agents and that can open a world of new possibilities if we let it.

There will be plenty of time for resolutions. Right now let’s have some fun and run the bloopers reel, in no particular order, of the year’s bad economic ideas.

1. The Green New Deal – Making precise predictions about the climate is nearly impossible, a fact any economist should respect. The UN Reports frequently referenced by the environmental left paint a serious picture, albeit one that can’t be summed up in the boldface blurbs our politics and media demand. Those reports don’t go as far as to predict “mass extinctions,” but proponents of plans like Bernie Sanders’ harrowing $16 trillion Green New Deal do. The plan misunderstands climate complexity just as much as Sanders’ billionaires narrative misunderstands the economy. But most frustratingly, supporters present a 12-year doomsday clock and then pile on a wishlist of not-directly-related progressive policies. The debate cannot go forward until Green New Dealers back up the claim of mass extinctions, or walk it back.

2. Hipster Antitrust – The emboldened far left also has big plans for antitrust. The nexus of regulatory policy and case law that defines our efforts to check the power of big business has been imperfectly but effectively delineated by the consumer welfare standard since the late 1970s. The self-proclaimed New Brandeisians, who earned the “hipster” moniker as a wry nod to their retro pre-consumer welfare aesthetic, focus on a host of other scenarios where big business might rear its head, such as labor market power. The economists behind the recent Utah Statement recommend numerous specific changes to regulation and legal doctrine, but what emerges is vast discretionary power for regulators and a rubber stamp for courts. Hopefully the Utah Statement will be the hipster antitrust movement’s Garden State, the moment when something cool becomes so obviously overwrought and precious that’s its silliness is on display for all.

3. Breaking Up Big Tech – Look no further than the New Brandeisians’ flagship project, the dismantling of tech giants Google, Facebook, and Amazon, for the dangers of these ideas. These corporations’ ascent raises new challenges such as data security and the control of information. It also reframes old issues, such as whether network effects that make bigger social platforms more valuable to consumers mitigate concerns over market power. Reevaluating the consumer welfare standard for the 21st century should be an “intellectual feast” for antitrust economists, but has instead become a potent political rallying cry invoking fear of the unknown and the incessant scapegoating of big corporations. There are no angels here–these companies have misstepped or worse and will do so again. But in a market where technological change still has a long course to run, lasting solutions will come from evolution–not intelligent design.

4. Protectionism – Our hipster friends may look back fifty years in search of policy, but nobody does retro quite like Peter Navarro, the one-man intellectual lawn mower engine keeping President Donald Trump’s disastrous trade policy sputtering along. Let’s call it early 1770s-chic, not bothering himself or the President with mainstream thinking such as Adam Smith’s debunking of mercantilism in The Wealth of Nations. It’s easy during Democratic primary season to forget just how anti-business our tycoon-President is, missing that international trade is commerce between people and firms across an ocean and instead envisioning himself and the Chinese Premier across a chess board. With neither side approaching checkmate, the people of both countries lose. There’s strong evidence that tariffs are behind the recent economic downturn, and the fact the President has wiped out most of his corporate and income tax cuts is undeniable.

5. Billionaire Tears – Let’s keep this simple: when candidates and their backers propose financially harming billionaires, the next question must be “who is helped, and how?” Is the debate about taxation and policy, over which fair minds can disagree, or merely crass post-Trumpist scapegoating? The latter is always misleading and corrosive, no matter how much money the target has.

6. New Tech, Old Jobs – Technological change never stops but that rarely prevents policymakers from trying to turn back the clock to the known, comfortable, and counterproductive. The so-called sharing economy, really about matching small buyers and sellers, has created unprecedented numbers of contract-work opportunities. We could be talking about ways to change with technology–healthcare and other benefits that move with workers instead of the now oddly longed-for days where company men had their needs met by the factory at which they worked their entire career. Proposals like California’s new crackdown on contract work may do the most harm by foreclosing opportunities that would only be revealed as technology and the labor market continued to coevolve.

7. Bitcoin Maximalism – As crypto continues its strange journey, Bitcoin maximalists who believe the original blockchain technology will, must, and should become all the money everyone uses remain its strangest travelers. It’s likely safe to bet against the predictions of someone who says the “free market” means they know exactly what’s going to happen. It’s an even safer bet when inevitability requires online bullying that grows in desperation as true uncertainty increases. While not perfectly overlapping, Bitcoin maximalism carries whiffs of “libertarians” who want the government out of the way so they can be the ones in charge. Market participants can be admonished to HODL, but markets won’t cave so easily, and they’ll decide what if any cryptocurrencies are in our future.

8. Inhale This, Don’t Inhale That – We don’t fully know the health risks of vaping nicotine oil, though to an addicted smoker they may be life-saving. The wave of deaths that turned out to be from an illness caused by Vitamin E oil in bootleg THC vapes was disturbing and tragic. It also paled in comparison to the number of smokers who die every day, but the four-month ban Massachusetts just lifted shows the potency of the expectation that politicians “do something.” Meanwhile, “legalizing” cannabis gave the state carte blanche to lord over sellers in ways that a mature industry wouldn’t tolerate–after a year 75% of sales remained away from the state’s grasp on the black market.

9. Elizabeth Warren – The Senator from Massachusetts and Presidential hopeful stakes at least a partial claim each of items one through six on this list (yes, even Trumpist protectionism). So why does she get her own spot? Warren represents something new in an American political scene that desperately needs fresh thinking, but her hyperactive technocracy combined with fire-breathing populism represents just about the worst embodiment one could find of central planning in mainstream politics. Senator Bernie Sanders, Warren’s rival on the left, loses interest in the private sector when he can’t dismantle it. Warren on the other hand wants to run the private sector. Her staggering number of plans, several dozen and more than I care to count at the time of this writing, would give her administration unprecedented discretionary power over the corporations and wealthy individuals she often demonizes. One could certainly see private wealth having the last laugh with countless new points of entry to the levers of government power. Or perhaps Warren could set us on the road to a state-capitalist model. That seems outlandish but Warren has repeatedly stunned me with her hubris this year as she produces plan after plan that indicate she thinks the right person just needs to tell companies what to do. 

10. National Conservatism – The left has unsurprisingly occupied most of the spots on this list–they’re the opposition and we’re approaching primary season which means plenty of ideas from radicals and one or two from centrists. Given the litany of destined-to-fail hail marys on this list, one might think the right would find it expedient to double down on its perceived affinity for free markets, but that would be easier had the perception ever been true. Events like Yoram Hazony’s national conservatism conference suggest that for much of the right “free markets” always meant what the left assumed it did–a preference for big business and the businessman in his place atop society’s hierarchy. In truth capitalism and conservatism don’t go hand in hand, the former being a force for constant change in society through bottom-up evolutionary means that while messy offer sounder guidance than any hand. Our system may offer the choice between Donald Trump and Elizabeth Warren. Bring it on. Never have those in the free-market camp been ceded more ground, but we need to jettison our old bad ideas too. Let’s be clear, libertarians have repeatedly made the mistake that right-populists also want small government. They don’t. They want to be the government. This isn’t a quick-turnaround opportunity, and more elections will likely come and go before we’re out of this hole. A lot of those bad ideas above have the seed of good intentions and those intentions can be met far more effectively by markets, philanthropy, and private governance. It may require patience and some dead-end bad ideas of our own, but the potential is out there to make people’s lives better without making everyone’s worse. That’s a daunting resolution for the new year, but consider the alternatives.

So much can change in one year.

As Sentiment Trader pointed out this morning, one year after December 24, 2018, when 54% of the indicators the market positioning service tracked showed extreme pessimism, on December 26 of this year a mirror image was observed, with 55% of indicators now representing extreme optimism “the most in 15 years.“

The latest RBC US Equity Investor Survey confirmed this observation. As RBC’s Lori Calvasina noted last week, in July 2019, CFTC data on US equity futures positioning returned to the highs of January 2018 and September 2018, which in turn were in line with pre-Financial Crisis highs. This told the bank’s chief equity strategist that “institutional investor positioning was euphoric and that the US stock market was vulnerable to bad news.” Sure enough, in August, positioning on this indicator fell sharply, getting about halfway back down to the May and December 2018 lows before stabilizing when the Fed launched its repo-market bailout and, shortly therafter, QE4.

Fast forward to today, when this indicator has moved up again in 4Q19, and as of December 10th was not only slightly above the levels that have marked significant peaks in the stock market over the past few years, but was at an all time high! (here the bank notes that each of the recent peaks are associated with policy catalysts (Tax Reform, Trade War, Fed Cuts.)

And to think all it took was one phone call…

Yet while institutions are now clearly at peak euphoria levels if only when responding to meaningless surveys, are they putting their money where their mouths are?

To answer that question we go to a recent note from Nomura’s quant Masanari Takada who points out that CTAs, which emerged as some of the most important marginal price setters in the past year, are currently looking to build long positions in equity futures. But, as Takada notes, “it also appears that, above and beyond the current US equity buying by trend-followers, the persistent buying of long positions in US equities by strategies of all types has led to an “explosive” increase in net exposure among hedge funds overall. For example, fundamentals-focused long/short funds and global macro hedge funds have also all been buying US equities (expanding gross long positions) in December.”

Needless to say, whereas a slow, gradual meltup is traditionally seen by markets as conducive to further gains, euphoria such as this tends to be a harbinger of a violent market reversal, and in some cases, an outright flash crash. So will the current sentiment tumble in the coming weeks, or in other words, is a flash crash imminent? While we will have more to say on this especially pertinent topic, here is the punchline from Nomura’s Takada who notes that at least for now, the main focus should be whether an unforeseen rise in 10yr UST yields will cause hedge funds overall to cool off on their US equity long positions, which have already reached a saturation point.

Meanwhile, don’t tell the bulls, but the CBOE SKEW Index (also known as the black swan index) has been steadily rising recently.

Still, as Takada explains, “this should be seen not as straightforwardly forecasting a sharp stock market correction but rather as indicating that hedging costs against the risk of an unexpected downward adjustment in share prices within one month have risen as a result of rapid growth in equity long positions by hedge funds overall.”

So while a flash crash may not be imminent, some investors are starting to quietly brace for one, and as Nomura concludes, “some hedge funds appear to have begun to show wariness toward a backlash from optimism even against the backdrop of a ‘melt-up’ in global equities.”

Authored by Charles Hugh Smith via OfTwoMinds blog,

Anyone looking at the hollowed-out, fragile shell of a Fed-managed “market” as a system realizes a crash that runs away from central planning control is already baked in.

The last thing punters and pundits expect is a stock “market” crash, yet a “market” crash is already baked in and here’s why: real markets have internal resilience (they’re anti-fragile, to use Nassim Taleb’s phrase), and central-planning manipulated “markets” don’t.

Few look at markets as obeying systems-level dynamics that have little to do with “news” or conventional metrics. The media makes money by reporting every tiny change in mood, metrics, rumors, etc., as if these drive markets. But we all know that the reality is much simpler: The Federal Reserve is the “market.”

In other words, the “market” is no longer a functioning (real) market; it is a central-planning signaling utility of the Fed and other central banks. This hollowing-out of the real market in favor of a central-planning, top-down controlled “market” destroys the system-level functions of markets.

If you want a refresher on the legitimate functions of a market, please read The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good, which explains why all the hundreds of billions of dollars of top-down, central-planning “aid” to impoverished nations has failed, enriching kleptocrats and autocratic regimes while assuaging the guilt of the poverty-pimps in the IMF, UN, and all the philanthro-capitalist foundations.

The only programs that actually improve the lives of the impoverished are those that enable small-scale markets in which participants make their own decisions rather than suffer the consequences of decisions made by central-planners who not only know nothing of local conditions, they’re uninterested in local conditions because we know best.

This is the core of central-planning: a handful of those with power make decisions that cripple markets’ ability to respond to reality by allocating goods, services, capital and credit as participants see fit.

Centrally planned markets enrich the few at the expense of the many. This is as true of “markets” in developed nations as it is in kleptocratic developing economies. The Fed is akin to Soviet-era central planners, and the net result is the same: capital is grossly misallocated, distortions are optimized to enrich the few at the top, and the market’s functionality is destroyed because it doesn’t align with the goals of the central planners.

Central planning hollows out systems and increases fragility and vulnerability. Once a market has been gutted and turned into a centrally planned “market,” it can no longer perform the key functions of markets: communicate information to all participants, discount flows of capital, goods and services, allocate capital, etc. These functions are what enable markets to alleviate poverty by increasing the wealth created by the free flow of information, goods, services, credit and capital.

Just as the collapse of the Soviet Union was baked in by the systemic fragilities of central planning, the Fed’s commandeering of the stock market bakes in a crash. In systems-speak, central planning manifests as non-linear effects, i.e. the consequences are not proportional to the triggering events.

Just as a light snow seems to have no effect on the snowpack piled on a mountain slope, central planning-manipulation seems to have no ill effects on “markets.” The signaling utility keeps signaling that all is well because “markets” keep rising until the snowpack gives way in an avalanche.

Central planning is all about creating the illusion of permanence and the illusion of beneficial control: central planners are careful to present themselves as all-powerful beings whose actions are beneficial to all. But like Soviet-era planners or top-down poverty pimps, their actions are not beneficial to all, and so they must labor mightily to create an illusion of permanence and absolute control, lest the systemic fragility they’ve unleashed become visible.

The Fed’s phony “market” only signals “all is well” when it’s rising, but this masks the reality that crashing markets are just as profitable as rising markets. The idea that rising markets are “good” and declining markets are “bad” is reserved for rubes and chumps, as traders and algos don’t care whether “markets” are going up or down, the only thing that matters is profiting from the trend.

Central planning optimizes a disconnect from reality that erodes trust in the market’s signals. Now that the Fed has commandeered the “market” as a signaling utility, it no longer reflects the real economy. Trust in its “signals” is as thin as liquidity: both are an inch deep and a mile wide, the ideal set-up for a crash that takes almost everyone by surprise.

Anyone looking at the hollowed-out, fragile shell of a Fed-managed “market” as a system realizes a crash that runs away from central planning control is already baked in. The timing is unknown, but the greater the confidence that the central planners are god-like, the closer we are to an “out of the blue” crash that takes the punditry and punters by surprise.

That this now seems completely and utterly “impossible” is an interesting signal in itself.

*  *  *

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Back in September, we reported that TV network OAN had filed a lawsuit against Rachel Maddow for the time the host said that OAN “really, literally is paid Russian propaganda.”

Now, Maddow finds herself having to come up with a defense for her statement in court. And she has also apparently hired Lionel Hutz as her legal adviser.

According to Culttture, her lawyers argued in a recent motion that “…the liberal host was clearly offering up her ‘own unique expression’ of her views to capture what she saw as the ‘ridiculous’ nature of the undisputed facts. Her comment, therefore, is a quintessential statement ‘of rhetorical hyperbole, incapable of being proved true or false.”

Oh, it’s capable of being proved false, alright. Maddow had previously claimed, on air, about one of OAN’s reporters: 

“In this case, the most obsequiously pro-Trump right wing news outlet in America is really literally is paid Russian propaganda,” and added, “Their on-air politics reporter (Kristian Rouz) is paid by the Russian government to produce propaganda for that government.”

The testimony of UC Santa Barbara linguistics professor Stefan Thomas Gries, however, stands at odds with Maddow’s defense. Gries said: “It is very unlikely that an average or reasonable/ordinary viewer would consider the sentence in question to be a statement of opinion.”

Gries continued:  “I am the second most widely-cited cognitive linguist and sixth most widely-cited living corpus linguist. The field of cognitive linguistics draws from both linguistics and psychology and studies how language interacts with cognition.”

OAN had filed the defamation suit in federal court in San Diego, according to AP. OAN is a small, family owned conservative network that is based in San Diego and has received favorable Tweets from the President. It is seen as a competitor to Fox News. 

OAN’s lawsuit claims that Maddow’s comments were retaliation after OAN President Charles Herring accused Comcast of censorship. The suit said that Comcast refuses to carry its channel because “counters the liberal politics of Comcast’s own news channel, MSNBC.”

It was about a week after Herring e-mailed a Comcast executive when Maddow opened her show by referring to a Daily Beast report that claimed an OAN employee also worked for Sputnik News, which has ties to the Russian government.

Maddow said: “In this case, the most obsequiously pro-Trump right-wing news outlet in America really literally is paid Russian propaganda. Their on-air U.S. politics reporter is paid by the Russian government to produce propaganda for that government.”

Except Maddow, likely still upset from spending 3 years trying to promulgate a Russian hoax that didn’t exist, didn’t quite get her facts straight. Big surprise.

Authored by Patrick Buchanan via Buchanan.org,

As of Dec. 26, Kim Jong Un’s “Christmas gift” to President Donald Trump had not arrived. Most foreign policy analysts predict it will be a missile test more impressive than any Pyongyang has yet carried off.

What is Kim’s game? What does Kim want?

He cannot want war with the United States, as this could result in the annihilation of the Kim family dynasty that has ruled North Korea since World War II. Kim is all about self-preservation.

What he appears to want in his confrontation with Trump is a victory without war. In the near-term, Kim seeks three things: recognition of his regime as the legitimate government of North Korea and its acceptance in all the forums of the world, trade and an end to all U.S. and U.N. sanctions, and a nuclear arsenal sufficient to deter a U.S. attack, including missiles that can strike U.S. bases in South Korea, Japan, Guam, and the Western Pacific. And he seeks the capability to deliver a nuclear warhead on the U.S. mainland.

Nor is this last goal unreasonable from Kim’s vantage point.

For he knows what became of the two other nations of George W. Bush’s “axis of evil” that failed to develop nuclear weapons.

Saddam Hussein’s Iraq was invaded, and he was hanged and his sons hunted down and killed.

The Ayatollah’s Iran negotiated a 2015 nuclear deal with America and opened up its nuclear facilities to intrusive inspections to show that Tehran did not have a nuclear weapons program.

Trump came to power, trashed the deal, reimposed sanctions and is choking Iran to death.

Moammar Gadhafi surrendered his WMD in 2004 and opened up his production facilities. And in 2011, the U.S. attacked Libya and Gadhafi was lynched by a mob.

Contrast the fate of these regimes and rulers with the Kim family’s success. His father, Kim Jong Il, tested nuclear weapons and missiles in defiance of U.S. warnings, and now the son is invited to summits with the U.S. president in Singapore and Hanoi.

If Kim did not have nuclear weapons, would American presidents be courting him? Would U.S. secretaries of state be visiting Pyongyang? If Kim did not have nuclear weapons who would pay the least attention to the Hermit Kingdom?

Undeniably, with his promised “Christmas gift,” possibly a missile capable of hitting the U.S., Kim is pushing the envelope. He is taunting the Americans. We have told him what he must do. And he is telling us where we can go.

But by so doing, Kim has put the ball squarely in Trump’s court.

The question Trump faces: Is he prepared to accept North Korea joining Russia and China as a third adversarial power with the ability to launch a nuclear strike on the continental United States?

And if U.S. sanctions are insufficient to force Kim to “denuclearize,” as seems apparent, is Trump prepared to force him to do so? Is Trump prepared to use “fire and fury” to remove Kim’s nukes?

With 28,500 U.S. troops and thousands of U.S. citizens in South Korea, many within artillery range of the DMZ, is Trump prepared to risk a clash that could ignite a second Korean War in the election year 2020?

Is the president prepared for whatever that might bring?

How does this confrontation play out?

A guess: The U.S. has lived with North Korea’s nuclear weapons for a decade, and Trump is not going to risk a second Korean conflict with a military attack on Kim’s nuclear and missile arsenals. Kim Jong Un and his father have created a new reality in Korea, and we are going to have to live with it.

Where does East Asia go from here?

South Korea has twice the population of the North and an economy 40 times as large. Japan has a population five times that of North Korea and an economy 100 times as large.

If the U.S. treaty guarantees, dating to the 1950s, to fight for these two nations come into question as a result of America’s reluctance to face down Pyongyang more forcibly on its nuclear arsenal, these nations are almost certain to start considering all options for their future security.

Among these are building their own nuclear arsenals and closer ties to the one nation that has shown it can discipline North Korea — China.

Much is on the line here.

Kim’s challenge is ultimately about the credibility of the United States, which has treaty commitments and issued war guarantees to scores of nations in NATO Europe, the Mideast and East Asia, but whose people have zero interest in any new war, especially a second Korean War.

If the world sees that America is reluctant to face down, or fight a North Korea that is threatening us, will they retain the old confidence that the United States will risk war for them?

What Kim is undermining is not just U.S. security but U.S. credibility.

With Tesla stock rising by $200 in three months, and more than doubling from its summer lows to hit a new all time high of $433 and sporting a record market cap of $78 billion, it’s time for a quick sanity check. 

At $433/share, TSLA’s market cap is now $77.8 billion. This makes it bigger than OEM giants Hyundai ($22BN), Ford ($37BN), General Motors ($52BN), BMW ($52BN) and Daimler ($60BN). Said otherwise Tesla, which sold 350,000 cars in the past 12 months, is now “bigger” than Hyundai, which sold 4.6 million cars in 2018, and General Motors, which sold 3 million cars last year, combined.

In fact, there is now just one OEM that is bigger than Tesla: Germany’s carmaking giant Volkswagen (which employs roughly 270,000 workers in Germany alone), and which recently overtook Toyota as the world’s largest automaker in terms of sales. 

So how did Tesla, eclipse OEMs which combined have sold about 20 times more cars between them? The answer remains simple: as S3’s Ihor Rusaniwski points out, despite the recent massive short squeeze, Tesla still remains the world’s most short automaker (with a couple of tiny exceptions such as BYD, Aston Martin and Nio), and as such what we are seeing now is a slow motion replica of the short squeeze that briefly made Volkswagen the world’s most valuable company in 2008, if only for a few hours.

As such, the question is when will the positive feedback loop of shorts covering, inspiring further bullishness, a more optimistic narrative, higher prices and even more short covering finally stop. Perhaps if more investors actually did some more sanity checks such as this one, the answer will come sooner rather than later.

Authored by Jeffrey Snider via Alhambra Investment Partners,

The way the global economy shifted from globally synchronized growth to globally synchronized downturn was specific: dollar then trade then manufacturing and industry which then spread into other areas. If the economy is to avoid moving further down that same track, then something in that chain of events must actually change.

Meaning just that: actual change in the way the numbers are pointing rather than just applying more positive words to mostly the same data.

As far as the dollar goes, not much luck there. In terms of trade, no dice, either. How about manufacturing, then?

In terms of the US economy, where industry is lagging behind the rest of the world’s trend, there has been renewed hope for revival especially in this area. Primarily due to the way Markit’s PMI’s have trended, the whole sector is being talked about as if it is on the rebound.

The ISM begs to differ; the last several months of figures from this alternate view at most haven’t gotten worse. What about others?

The Federal Reserve’s various branches have collected manufacturing sentiment data from among constituent manufacturers for decades. If we are looking to break the tie, so to speak, between Markit and the ISM perhaps the regional surveys can provide enough consistent evidence to do so.

The general trend overall is clear enough, meaning that Euro$ #4 is as obvious now as Reflation #3 was during 2017. Things were on the way up into that year, stopped rising and began transitioning the following year (2018), and like the rest of the world have come back down this year (2019).

But to discern any possible inflections more recently, we’ll have to separate the surveys into like comparisons.

First, what were probably the best cases at least for the rebound narrative that began to appear in late summer. Both the Philly and Dallas Fed data had been rising after a rough patch toward the end of 2018 and at the beginning of 2019.

Just past midyear, however, the Philly branch had recorded a jump back to +21.8 for July. It was the highest since the previous summer. And it was up from a low of -4.1 registered during February.

For almost those same months, the Texas Manufacturing Outlook Survey followed in August 2019 with its own recent high. Coming back up from +6.2 last December and then +6.3 in May 2019, it would reach +17.9 and seemingly back on the rise.

Since then, however, both are heading right back down toward and to contraction territory. For Texas, November’s estimate was the first monthly minus since Euro$ #3, while for Philly it was only the second time at or less than zero going back to the same.

With those two now heading the wrong way, they put Richmond and the New York Fed’s Empire Survey into the updated category of best case. For the latter, the index has like the ISM flatlined at a much lower level in 2019 than during 2018. Not getting worse but also, contrary to the narrative, not getting better.

In Richmond, it has been mostly the same except for more volatility in the survey presumably because of volatility in the region’s manufacturing economy. The latest reading for the month of December, however, came in way short of expectations for +9 (which would have continued the rough upward trend), instead moving even further into contraction at -5.

It raises questions about the same kind of midyear improvement as had been indicated in Philly and Dallas.

Of the major regional Fed surveys, that leaves only KC’s which really doesn’t require any commentary. The central bank’s Tenth District, covering most of the middle portion of the country, doesn’t appear to be improving nor has it at any point during 2019. It is the worst case.

Not only does KC indicate continued and accelerating contraction across that specific manufacturing region, the data looks to be in close agreement with the ISM’s much broader Manufacturing PMI.

The Fed’s sentiment figures across the major set of them seem more consistent with the ISM than IHS Markit.

We already know about which way the dollar seems to be leaning, and therefore the continued problems across global trade. It would only make sense, then, that US manufacturing would be heading in that same direction if maybe not all at once or all at the same time (nothing goes in a straight line).

These figures are far from definitive, of course, but the majority of the data sets are now at odds with the idea of rebound – one that is supposedly getting stronger. Even Dallas and Philly are heading in the wrong direction (again), suggesting instead renewed difficulties in domestic production (which is consistent with more recent data showing seriously flagging US imports).

If that is indeed the case, then dollar, trade, and manufacturing continue to be consistently against this idea of a “strong” economy and its epic unemployment rate.