Tag: finance

Some time in the past 3 years, US capital markets – already rigged and broken beyond comprehension by central banks and HFTs – crossed over into the realm of absurdity, but it wasn’t until this Friday that we got official confirmation. That’s when JPMorgan came up with the “Volfefe Index” (remember Covfefe) to quantify Trump’s impact on rate volatility.

When it comes to Trump’s tweeting habit, there are two approaches. One can ignore them, as Asia is increasingly doing, or one can obsess over them and use them as the springboard for violent daily market reversals.

Commenting on the former, last week we said that is starting to ignore Trump’s tweets, for three reasons: First, China doesn’t have easy access to them, since the social media service is banned there;  second, the President’s tweets often occur outside of Chinese trading hours, causing them to have less of an effect on Chinese markets than U.S. markets; Finally, the novelty simply seems to be wearing off.  

Zhang Haidong, a fund manager at Jinkuang Investment Management in Shanghai said: “It’s pointless following him too closely — he might say something today and it will be a whole different story tomorrow. Trading off his tweets alone would be too volatile.”

Indeed, as the next chart shows, the Chinese stock market is becoming immune to anything the Trump twitter feed unleashes on the world.

In the US however, it’s a different story, and Trump’s tweets carry as potent a punch on market volatility and stock prices as ever, especially since twitter is the venue where the president has announced two of his last trade escalations against China. Or perhaps it’s just reflexivity, as Trump tends to tweet up a storm whenever the market is dropping, in hopes of “tweeting” the market higher.

Whatever the arrow of causality, last week Bank of America found that since 2016, on days with more than 35 tweets (90th percentile) by President Trump, the market has seen seen negative returns (-9bp), whereas on days when Trump keeps it to less than 5 tweets (10th percentile), the market has posted positive returns (+5bp), both of which are statistically significant.

Fast forward to Friday when JPMorgan’s rates strategists decided to actually quantify the impact of Trump’s tweets on volatility in the bond market, and so the Volfefe Index was born.

Not surprisingly, JPM found that the index explains a measurable fraction of the moves in implied rate volatility for 2-year and 5-year Treasurys.

“This makes rough sense as much of the president’s tweets have been focused on the Federal Reserve, and as trade tensions are broadly seen as, first and foremost, impactful on near-term economic performance and, likewise, the Fed’s reaction to such developments,” wrote JPM’s analysts led by Munier Salem.

Besides his pet peeve, the Fed, which Trump believes is out to get him by not cutting rates faster (an assumption that was merely cast away as merely paranoia until Bill Dudley, like a total idiot, decided to insert his foot in his mouth and confirm that the Fed does indeed pick US presidents and monetary policy is used to influence presidential elections) Trump’s market-moving messages have also addressed trade and monetary policy, with key words including “China,” “billion,” “products”, “Democrats”, “great” and “dollars”…

… although as JPM points out, these tweets are increasingly less likely to see “fewer favorable responses (likes and retweets) from the president’s followers compared to other, contemporaneous remarks.”

The good news is that there is more than enough data for any statistical model as over the past three years, since his election in 2016, Trump has averaged more than 10 tweets a day to some 64 million followers — roughly 14,000 total over that period associated with his personal account, of which more than 10,000 since taking office, a pace that has continued to accelerate and in recent months has peaked at over a dozen non-retweets per day.

Yet, as JPMorgan found, out of the roughly 4,000 non-retweets that have taken place during market hours from 2018 to the present, only 146 moved the market,  although Trump’s market moving tweets have seen an increase in “dramatic fashion” of late, coinciding with a spike in volatility, JPM found.

JPM also found that most of Trump’s tweets come in the two-hour block from noon to 2:00 pm, with a 1:00 pm tweet roughly three times as likely to arrive at any other hour of the afternoon or evening. One bizarre observation is that Trump’s 3:00 am tweets were more common than his 3:00 pm tweets, which is a pain for both US rates and equity futures markets, as overnight liquidity is especially dismal. And an interesting finding from Trump’s tweeting pattern: the president is presumably sleeping from 5:00 am to 10:00 as there’s a lull in tweeting activity during that time.

Finally, while there has clearly been a surge in overall twitter activity by the president, “a substantial fraction of this rise in activity comes from an increased propensity to retweet others”, JPM finds. Excluding these non-original tweets, the recent surge in presidential tweeting is far more timid.

JPMorgan’s conclusion: “the president’s remarks on this social medial platform have played a statistically significant in elevating implied volatility.“

Yet while a cottage industry of Trump Twitter experts has emerged in recent months, the reality is that even if Trump has elevated market volatility, it has yet to adversely impact the overall market, which remains 40% higher since Trump’s election, and roughly 30% since his inauguration, even if the S&P has gone almost nowhere in the past 12 months.

Despite Washington’s pleas that UK/Gibraltar authorities refrain from releasing the Iranian-flagged Adrian Darya-1 tanker over concerns that it would deliver its 2.1 million barrels of Iranian crude oil to Syria, the ship was released last month. Shortly after, it “went dark” – turning off its transponder earlier this month to mask the fact that it was delivering a load of crude to Syria – or at least that’s what National Security Advisor John Bolton suspects happened.

And not without good reason. The tanker, which was photographed off Syrian port of Tartus, is one more reason for the US and Europe to treat Iran’s written assurances that it wouldn’t engage in such “illegal” deliveries – assurances that the UK used as the basis for its decision to release the vessel from custody – with wariness and suspicion.

But the Adrian Darya-1 is merely one example of how Iran has managed to keep exporting oil, often in violation of US and EU sanctions, in spite of the international crackdown. As Bloomberg reports, Tehran is engaged in a cat-and-mouse game with tanker-tracking firms around the world that have developed new strategies for monitoring Iran’s “Dark Fleet”.

The quest has led to ever more inventive methods of tracking ships, and divergent views on the amounts of crude secretly slipping into world markets. That’s because the vessels have mostly “gone dark” since sanctions were tightened this year, switching off transponders that would reveal their location.

“Iran is a black box, but it’s also not a black box” as there are ways to uncover secretive activity, said Devin Geoghegan, global director of petroleum intelligence at Genscape Inc. in Denver, Colorado. “Iran is simply doing a better job of putting their oil into other people’s hands – or their own storage tin-cans – than anybody has expected.”

The Trump Administration’s goal of driving Iranian oil exports “to zero” hasn’t been very successful, as Iranian Oil Minister Bijan Zanganeh insists that he is working “day and night” to protect sales, using a number of clandestine options.

The various companies struggling to monitor the flow of oil out of Iran agree that Iranian oil exports are far from zero. But analysts’ estimates on how much vary from a couple hundred thousand barrels a day to more than a million.

One Switzerland-based tracking firm believes Iran is shipping barely one-third of the amount it sold during the last round of heightened sanctions earlier in the decade, when Barack Obama was in office. According to Daniel Gerber, the firm’s CEO, the Trump Administration has been largely successful at curtailing Iran’s exports.

“Iran is as secretive now as any time over the past 40 years,” said Daniel Gerber, chief executive officer of Geneva-based tanker-tracking firm Petro-Logistics SA. “There’s a wide array of diverging estimates of their exports in the industry, with a series of accounting problems causing erroneous higher numbers to come into some of these.”

Iran is now barely shipping a third of the amount it sold during the previous round of sanctions imposed earlier this decade, Gerber said. Some other estimates have been inflated because they include all the oil that’s been loaded onto tankers, or put into domestic storage, rather than just what’s been shipped overseas, he said.

“The Trump administration has been successful at curtailing Iran’s exports on an unprecedented scale,” according to Gerber, who said Petro-Logistics is able to obtain details on the volumes and crude-type of individual cargoes, as well as on the counter-parties buying them.

Paris-based tracking firm Kpler has developed a unique strategy for tracking Iranian crude. It uses commercial satellite images, then cross-references them with data from customs agencies and reports from various ports. Because of this, Kpler believes Iran has maintained “limited” flows of oil into China – Iran’s most important customer – as well as Turkey and Syria.

Kpler analyst Samah Ahmed believes Iran is employing a range of techniques to try to avoid detection, including “several ship-to-ship transfers off-radar” – a technique that is also famously used by North Korea. Like Petro-Logistics, Kpler believes the Trump Administration has been largely successful at choking off Iran’s oil exports. By its account, Kpler believes Iranian oil exports have slumped 90% to just 400,000 barrels a day since the Trump Administration abandoned the Iranian nuclear deal in May 2018.

“The goal of bringing Iran’s exports down to zero was never attained,” said Homayoun Falakshahi, an analyst at the firm. Yet “the Trump administration has been obviously very successful in bringing maximum pressure.”

Yet, the amount of oil that Iran sells for cash is likely even lower, since a large percentage of the oil that it exports is used to pay off its debts to China.

The actual volume that Iran is selling for cash is probably even lower, according to Sara Vakhshouri, head of consultants SVB Energy International in Washington, D.C.

Some cargoes are sold to repay debts to China, and others are moved into so-called bonded storage there without passing customs, meaning they’re still owned by Iran. As a result, total sales in July may have been as little as 100,000 barrels a day, she said.

Finally, Genscape’s Geoghegan believes Iran’s output of crude and condensate has fallen only 15% since the first quarter of 2018. Total production might be as much as 3.9 million barrels per day, with exports as high as 1 million bpd as Iran moves “full speed ahead”, drilling at new fields in the West Karoun region.

Among the various commercial tracking firms, Genscape’s methodology is truly unique. Instead of relying on satellite images of tanker traffic, Genscape uses satellite photos of gas flaring at oil fields to gauge their levels of activity.

But according to Geoghegan, the resilience of Iran’s oil industry might not endure for much longer. As storage fills up, Iran may need to lower its output.

“We have seen every tin-can that they have get filled up, and we’ve seen oil fill up in areas that they haven’t historically used,” Geoghegan said. “They’re going to hit a brick wall at some point, and their production is going to take another leg down.”

Hence why Iran has been seizing ships in the Persian Gulf and Strait of Hormuz suspected of smuggling – ships like the “tugboat” suspected of smuggling nearly 284,000 liters of diesel. As Washington’s campaign of “massive pressure” intensifies, Tehran’s is continuing with its campaign of “counter-pressure” to try and protect its oil-dependent economy. 

Authored by Andrew Sheets, chief cross-asset strategist at Morgan Stanley

This week’s Sunday Start is 20% on why we’d advise investors coming back from the summer to stay cautious, and 80% on a particular challenge facing today’s market: What to do if things get better.

Over the last year, global equities are up just 1% (with 12.5% annualized volatility). The mighty S&P 500 is up 4%. After the challenges of the last 12 months, a reasonable question to ask is whether conditions are better, worse or similar to a year ago, when we sat at similar levels. Broadly speaking, we think they’re worse. Relative to September 2018:

• Global growth has deteriorated, with US, eurozone and China PMIs falling below 50 and showing acute weakness in new orders.
• The global trade backdrop is worse, with volumes falling and US-China tensions escalating despite repeated reports of progress.
• Government bond yields and the yield curve are sending more troubling signals, with the market pricing in more and more policy easing but lower and lower long-term rates and inflation.
• Oil and copper prices are lower, consistent with more challenging global growth.
• Earnings growth globally has decelerated sharply. Global equity earnings were growing at 17%Y in 3Q18. For 3Q19, they’re growing at just 1%Y.

In short, investors are returning to similar levels in equity and credit as a year ago and a backdrop that’s at least as unsettling. Since the last 12 months were no walk in the park, we think caution is warranted, and remain underweight global equities and credit.

But what if we’re wrong? The development most likely to change our view would be a significant improvement in global growth/trade (rather than, say, new central bank action, or a sudden asset allocation shift from bonds to stocks). If we’re right that better data hold the key to removing recessionary fears and boosting market confidence, there’s an important caveat: the bull case involves a material sting in the tail, and this week gave us a preview.

Let’s assume our below-consensus view for global growth is wrong, and improvement comes through a combination of thawing trade tensions, additional China stimulus and global PMIs bottoming. In this scenario, yields and inflation expectations would rise meaningfully, as markets assume less easing is needed and better days lie ahead. The yield curve would steepen (ed: recall “Curve Inversion Is Bad, But It’s The Steepening After That Kills“), as central banks keep policy easy in the near term. Higher yields and a steeper curve would spark a rally in financial stocks. Smaller and more cyclical stocks would benefit from hopes of economic re-acceleration. Higher-quality businesses would no longer warrant special premiums.

This is nothing more than a standard early-cycle playbook, but it’s worth considering. While some investors are positioned for mid-cycle, others late-cycle and still others recession, very few appear to have such a scenario in mind. Consider:

• Bond markets are priced for yields to stay low and the curve to remain unusually flat.
• Expected inflation in the eurozone, Japan and the US is in the 7th, 10th and 9th percentile versus the last 15 years.
• The valuation of Value stocks versus the market is in the 11th percentile versus the last 20 years.
• Quality stocks versus the market are in the 99th percentile.
• US small versus large-cap stocks are in the 6th percentile.

What does this mean? We focus on two implications.

First, we continue to believe, strongly, that equity prices and bond yields are likely to keep moving in the same direction (stocks higher/yields higher), consistent with the equity bull case being tied to better growth rather than policy action. We remain cautious in part because our economists are more negative than consensus on the global growth outlook (yet also forecast fewer rate cuts from the Fed and ECB over the next year than markets imply).

Second, the extent to which investors are paying up for various forms of ‘defense’ suggests there are better cross-asset alternatives, which can still diversify if growth weakens further with less risk if things improve. Long JPY, long Asia equity vol and short US high yield credit are all hedges that we think have good risk/reward and relatively ‘normal’ valuations. We dislike Quality and Growth relative to the market in both the US and Europe. We think they are expensive, over-owned and more cyclical than appreciated.

This week’s rally shined a light on the market’s bull case, and the importance of a better economy to that story. Given our cautious views on growth, trade progress and central bank action relative to consensus, we maintain our cautious stance. But this week was a shot across the bow: if we’re wrong and growth is set to reaccelerate, the market isn’t positioned for it. The moves could be large.

It’s official: Iran says its Adrian Darya tanker has finally offloaded its 2.1 million barrels of Iranian oil Sunday after it was days ago spotted off the Syrian port of Tartus, bringing a lengthy standoff with the US and UK which sought to capture the vessel’s valuable cargo to an end. 

“The Adrian Darya oil tanker finally docked on the Mediterranean coast… and unloaded its cargo,” Foreign Ministry spokesman Abbas Mousavi said according to state-run IRNA. He didn’t name the country which purchased the oil, but satellite images reveal the IRGC-controlled vessel hasn’t left Syria’s coast. 

Part of the US case for pressing UK/Gibraltar authorities to not release the vessel from detention last month was that it would ultimately attempt an ‘illegal’ delivery of its Iranian crude worth about $130 million to Syria.

Gibraltar’s Aug. 15th release of the vessel came only after Iran issued a written assurance it would not deliver the Iranian oil to Syria, in violation of EU sanctions.

At the start of this weekend after the Iranian tanker was observed within a few nautical miles of Syria’s coast, John Bolton issued an ‘I told ya so’ type tweet, saying, “Anyone who said the Adrian Darya-1 wasn’t headed to Syria is in denial.”

But it doesn’t appear Washington is going to do anything about it. 

Washington has done everything short of military action to thwart and detain the vessel, including issuing a seizure warrant and bribing the ship’s captain with millions of dollars to steer it into a US-allied port. 

Thankfully Syrians will receive much needed fuel supplies. Sanctions hurt the weakest and poorest. They are a form of collective punishment that the US should abjure. This is a misguided policy that will not dislodge Assad, but will add to the suffering of powerless Syrians. https://t.co/TxbMQ8GYuW

— Joshua Landis (@joshua_landis) September 8, 2019

Despite Iran’s now confirming the delivery of the oil, evidently to Syria, a US Treasury official on Sunday disputed whether the actual offloading had taken place at the time of Iran’s announcement. 

“Right now it’s parked right outside of Syria,” Sigal P Mandelker, a US Treasury official, was quoted in Al Jazeera as saying. “So it’s yet another game of deception that we see them engaged in that we think the world needs to open its eyes to.”

Authored by Caitlin Johnstone via Medium.com,

Americans are discussing the possibility of a universal basic income (UBI) more seriously than ever before, largely due to the surprisingly popular campaign of Democratic presidential candidate Andrew Yang.

Yang has made UBI the central issue of his platform, promising a “Freedom Dividend” paid for by a Value Added Tax on businesses which would give every American over the age of 18 an unconditional $1,000 a month to help offset the looming crisis of automation replacing US jobs.

“In the next 12 years, 1 out of 3 American workers are at risk of losing their jobs to new technologies — and unlike with previous waves of automation, this time new jobs will not appear quickly enough in large enough numbers to make up for it,” Yang’s campaign site argues.

“To avoid an unprecedented crisis, we’re going to have to find a new solution, unlike anything we’ve done before. It all begins with the Freedom Dividend, a universal basic income for all American adults, no strings attached – a foundation on which a stable, prosperous, and just society can be built.”

Yang is absolutely correct that automation is going to be replacing the jobs of many people in the very near future, and he is absolutely correct that new solutions unlike anything ever tried before are going to be necessary to help address this problem. But his plan, and indeed all the most publicized plans which involve the implementation of a universal basic income, will necessarily lead to an oppressive oligarchic dystopia unlike anything we’ve ever seen before.

Jeff Bezos is in favor of a universal basic income. https://t.co/ohsW00PNKS

— Matt Stoller (@matthewstoller) September 24, 2017

Do you know who supports the implementation of a UBI besides Andrew Yang? Billionaires. Lots of billionaires, especially the new money tech billionaires who are positioning themselves to inherit the earth in the transition to a new paradigm dominated by automation and artificial intelligence. Billionaires like Jeff Bezos, Pierre Omidyar, Mark Zuckerberg, Jack Dorsey, Elon Musk, Richard Branson, Bill Gross, Tim Draper, and more moderately Bill Gates have all been seen advocating for a policy that is now being popularized as one which would level the economic playing field and take power away from the billionaire class.

Now why would that be? Why would a group of people who’ve clawed their way up to positions of immense wealth control, enabling them to live as modern-day kings, be so eager to suddenly give away that power? Why would they break with the trend we’ve consistently observed in rulers since the dawn of recorded history and voluntarily relinquish the power they fought to claim without a fight? Are billionaires just naturally good people inherently predisposed to compassionate action and wealth redistribution? Have we been wrong about Jeff Bezos being a real-life supervillain this entire time?

Of course not. This increasingly powerful class of new money tech plutocrats are not pushing to give power away, they’re pushing to secure more. As Jimmy Stewart’s character says in It’s A Wonderful Life, Potter isn’t selling, Potter’s buying.

I am not arguing against the general principle of universal basic income here. If humanity is to learn to collaborate in a healthy way with the ecosystem in which we evolved, a lot more of us are going to have to start doing a lot less. We’re going to have to stop using up energy driving to jobs the world doesn’t need to produce crap you have to propagandize people into believing they want so they’ll spend money on it and then throw it in the landfill. That’s obviously an insane way for an increasingly technologically advanced species to continue to function, and one way or another we are going to have to start doing a lot more nothing quite soon.

But imagine what will happen with a system of the kind Yang and the tech billionaires are proposing. Imagine what will happen in a society where people are no longer necessary and have nothing the powerful need. Imagine what will happen when people become dependent on a subsistence UBI set up by the already plutocrat-controlled government to sustain them when plutocrat-owned technologies render their labor completely moot. Imagine a world where a few increasingly consolidated automation firms produce more and more of the goods and services once provided by human labor and re-collect all taxes they have to pay into the UBI from a public forced by their subsistence wages to buy automation-made products and services.

That would be total oligarchic control. Not what we’re seeing now; what we’re seeing now is not total oligarchic control. Our current predicament pales in comparison to how bad it could get.

Think about what would happen in that situation if people decided they weren’t being treated fairly by the existing system. What recourse would they have? They can’t organize labor strikes if they have no labor. They can’t boycott if everything is made by the same corrupt system. Mass demonstrations and civil disobedience would go unnoticed by a power structure that needs nothing from its populace. Violent revolution would be an unwinnable game as security systems protecting the infrastructure of the powerful would also become automated. People would cease to be active participants in their society, and would instead be merely along for the ride at the whims of the oligarchs, for as long as the oligarchs deemed them not too inconvenient to keep around.

Because our last bargaining chips would have been taken away from us.

Think about how such a paradigm would dance with the current populist movements we’re seeing in the world today as people grow upset with their already oppressive living conditions. The left will be neutered far more definitively than it has been by anything that government agencies have ever been able to engineer; the workers can’t unite if there are no workers. Yellow Vests-type demonstrations would have no effect on a power structure that doesn’t require law and order outside its automation complexes. Attempts to vote the problem away will be laughed off by a political system that is even more oligarch-controlled than it already is.

Now imagine how that would dance if you add in the sort of narrative domination that advanced artificial intelligence programs would allow, as Julian Assange warned shortly before his silencing. We are already seeing such programs being developed by shady government agencies, along with increasingly Orwellian high tech surveillance systems.

That’s what the billionaires are going for. That’s what Potter’s buying.

The rich and powerful have always feared two things: death and the public. Because both of those things can take away everything they’ve stolen. Our current rulers, the billionaire class, are currently working on unlocking the secret of immortality in a number of creepy ways, and they’re working on addressing the problem of the public in the way I just described. Someday Jeff Bezos and his ilk hope to become the first rulers in history who get to rule without the threat of losing it all to death or to revolution.

The solution, obviously, is to stop this before it happens, because if it’s allowed to happen it will be far too late to do anything about it. People are going to have to wake up out of the propaganda matrix and take power away from the billionaire class, and that must necessarily include taking control of automation technologies. Artificial intelligence and automation are far too consequential for their future to be determined by a few billionaires who are only billionaires because they can think like a machine better than other people can. Humanity’s future must be guided by the collective wisdom of all human beings in the service of humankind, not by binary-minded tech wizards in the service of corporate profit margins.

A universal basic income could work under a very different system, but the one thing all the most popular UBI/automation models being promoted by the billionaire class and by Andrew Yang have in common is that none of them seek to fundamentally change the system which enables plutocrats to shore up more and more power and control for themselves. They all seek to maintain the status quo and plunge it further into oligarch-dominated dystopia. This should be rejected.

This article originally said Yang’s plan is to give $1,000 to every American between 18 and 64, but that’s an older plan of his. Yang’s “Freedom Dividend” would be for every American over 18.

*  *  *

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Thanks to advances in biometric payment technologies and ultra-slick payment systems, Silicon Valley has made it incredibly convenient to shop, pay for, and consume just about anything; and it’s about to get easier, according to MarketWatch‘s Quentin Fottrell. 

In the last decade, we’ve gone from physical credit cards to biometric mobile wallets – allowing people to store payment data in smartphones, watches, smart glasses and other devices. Now, these ‘last physical barriers’ are about to be supplanted by facial recognition. 

“The deeper the tie between the human body and the financial networks, the fewer intimate spaces will be left unconnected to those networks,” said Aram Sinnreich, associate professor of communication studies at American University and author of “The Essential Guide to Intellectual Property.

“Every technological necessity exists in the real world and is used commercially,” he says, adding “It just hasn’t all been integrated into one biometric-payment method yet because it would creep people out.”

“It’s the neoliberal takeover of the human body.” 

After a slow start, the global mobile-payment market is expected to record a compound annual growth rate of 33%, reaching $457 billion in 2026, according to market-research firm IT Intelligence Markets. As payments move from cash to credit cards to smartphones, financial-technology companies, known as fintechs, have been honing their biometric services.

Biometric technology, meanwhile, is infiltrating every other aspect of our digital lives. Juniper Research forecasts that mobile biometrics will authenticate $2 trillion in in-store and remote mobile-payments transactions in 2023, 17 times more than the estimated $124 billion in such transactions last year. –MarketWatch

“Using biometrics as a method of payment is going to be pretty popular in the future,” said attorney Hannah Zimmerman, who says the technology will propelled by “the globalization of commerce.” 

Frictionless payments translate to more spending

A University of Illinois study found that people’s purchases increased by almost 25% when mobile payment systems were used. Researchers found that the use of a mobile wallet boosted spending by 2.4% over those who don’t use them. Meanwhile, Chicago-based Consumer Intelligence Research found in a survey of 2,000 American customers that Amazon Echo smart speaker users spent 66% more on average with the online retailer than other consumers. 

As Fottrell notes, however “people who have the money to buy smart speakers may also have more to spend.” 

Still, it provides a window into the world of frictionless spending: Echo owners spend $1,700 annually at Amazon versus $1,300 among Amazon Prime members — who must pay a $99 a year subscription — and $1,000 for all Amazon customers in the U.S. Some people may have both Echo devices and Prime accounts. (Amazon did not respond to a request for comment.) –MarketWatch

Read the rest of the report here. 

Authored by John Mauldin via MauldinEconomics.com,

The last few weeks marked a turning point in the global economy.

It’s more than the trade war. A sense of vulnerability is replacing the previous confidence – and with good reason.

We are vulnerable, and we’ll be lucky to get through the 2020s without major damage.

Let’s talk about the risks facing us in the next year or so and the economic environment in which we will face those risks.

Supply Shocks Ahead

In a recent Project Syndicate piece, NYU professor and economist Nouriel Roubini outlined three potential shocks, any one of which could trigger a recession:

• The US-China trade and currency war

• A slower-brewing US-China technology cold war (which could have much larger long-term implications)

• Tension with Iran that could threaten Middle East oil exports

The first of those seems to be getting worse. The second is getting no better. I consider the third one unlikely.

In any case, unlike 2008, which was primarily a demand shock, these threaten the supply of various goods. They would reduce output and thus raise prices for raw materials, intermediate goods, and/or finished consumer products.

Roubini thinks the effect would be stagflationary, similar to the 1970s.

Because these are supply and not demand shocks, if Nouriel is right, the kind of fiscal and monetary policies employed in 2008 will be less effective this time, and possibly harmful.

Interest rate cuts could aggravate price inflation instead of stimulating growth. That, in turn, would probably reduce consumer spending, which for now is the only thing standing between us and recession.

Subnormal Growth

Most of our problems come down to debt.

Debt isn’t bad and may even be good if it is used productively. Much of it isn’t.

In theory, an economy overloaded with unproductive debt should see rising interest rates due to the excess risk it is taking. Yet we are in a low and falling-rate world. Why?

Lacy Hunt of Hoisington Management proved that government debt accelerations depress business conditions. This reduces economic growth, so rates fall. The data shows the amount of GDP each dollar of new debt generates has been steadily declining.

This is a problem because, among other reasons, central banks still think lower rates are the solution to our problems. So does President Trump.

They are all sadly mistaken, but remain intent on pushing rates closer to zero and then below. This is not going to have the desired effect.

If Lacy is right, as I believe he is, the Federal Reserve is on track to do exactly the wrong thing by dropping rates further as the economy weakens.

The Fed also did the wrong thing by hiking rates in 2018. They should have been slowly raising rates in 2013 and after. They waited too long. This long string of mistakes leaves policymakers with no good choices now.

The best thing they can do is nothing, but that’s apparently not on the menu.

Paralyzed Business

All this bears down on us as other things are changing, too.

Many relate to shrinking world trade. Trump’s trade war hasn’t helped, but globalization was already reversing before he took office.

Industrial automation and other technologies are killing the “wage arbitrage” that moved Western manufacturing to low-wage countries like China. Higher wages in those places are also reducing the advantage. This will continue.

Ideally, this process would have happened gradually and given everyone time to adapt. Trump and his Svengali-like trade advisor, Peter Navarro, want it now. I think the president’s recent demand that US companies leave China wasn’t a bluff. He wants that outcome, and he has the tools to attempt to force it. The only question is whether he will.

I agree that we have to deal with China but the fact that we must do something doesn’t make everything feasible or advisable.

Tariffs are a counterproductive bad idea. Severing supply chains built over decades in less than a few years is, if possible, an even worse idea. It will kill millions of US jobs as factories shut down for lack of components.

Some say this is just more Trump negotiating bluster. Maybe so, but the mere threat paralyzes business activity.

CEOs and boards don’t make major capital commitments without some kind of certainty on their costs and returns. The president is making that impossible for many.

Europe in Shambles

Europe is rapidly turning into a major problem, too. Negative interest rates there are symptoms of an underlying disease. Italy is already in recession. Germany suffered its first negative quarter and may enter “official” recession soon.

Germany is highly export-dependent. The entire euro currency project was arguably a plot to boost German exports, and it worked pretty well.

But it boosted them too much, bankrupting countries like Greece which bought those exports. China, another big customer, is buying less as well.

A German recession will have a global effect. Automobile sales are down and Brexit could mean further declines. That would most assuredly deliver a German and thus a Europe-wide recession. And it will affect US exports and jobs.

Then there’s Brexit. At this point we still don’t know if the UK and EU will reach terms, but there is some risk of a hard end to this drama. News focuses on the damage within the UK, but it will also affect the EU countries, mainly Germany, who trade with the UK.

These supply chains are no less intricate and established than the US-China ones. Tearing them down and rebuilding them will take time and money. The transition costs will be significant.

Bumpy Ride

Remember when experts said to keep politics out of your investment strategy?

We no longer have that choice. Political decisions and election results around the globe now have direct, immediate market consequences. Brexit is just one example.

A far bigger one is the looming 2020 US campaign. None of the possible outcomes are particularly good. I think the best we can hope for is continued gridlock.

But between now and November 2020, none of us will know the outcome. Instead, a never-ending stream of poll results will show one side or the other has the upper hand.

That will generate high market volatility, inspiring politicians and central bankers to “do something” that will probably be the wrong thing.

As noted above, if Roubini is right then rate cuts aren’t going to help. Nor will QE. Both are simply ways of encouraging more debt which Lacy Hunt’s work shows is no longer effective at stimulating growth.

They are, however, effective at blowing up bubbles.

I expect 2020 to be one of the most volatile market years of my lifetime.

I predict an unprecedented crisis that will lead to the biggest wipeout of wealth in history. And most investors are completely unaware of the pressure building right now. Learn more here.

The U.S. Army is getting much closer to deploying the next generation weapon that could soon replace the M4 carbine and M249 light machine gun sometime in the early 2020s.

On Aug. 29, the Army announced it selected three defense companies to deliver prototype weapons for the Next Generation Squad Weapons (NGSW) program.

The new weapons must be lighter and able to penetrate the world’s most advanced body armor from at least 600 meters away, defense insiders say.

“This is a weapon that could defeat any body armor, any planned body armor that we know of in the future,” former Army Chief of Staff Gen. Mark Milley has said.

“This is a weapon that can go out at ranges that are unknown today. There is a target acquisition system built into this thing that is unlike anything that exists today. This is a very sophisticated weapon.”

The announcement was originally posted on the Federal Business Opportunities website on Aug. 29. The notice said the Army selected AAI Corporation Textron Systems, General Dynamics Ordnance, and Sig Sauer as the three finalists for the NGSW program, reported Defense Blog.

For those that missed the reveal months ago, here’s AAI’s (@Textron subsidiary) prototypes for the #USArmy‘s NGSW program. The first pic is the offer for the NGSW-R segment (M4 rifle replacement), the 2nd pic shows the two NGSW-AR prototypes (M249 SAW replacement), both in 6.8mm. pic.twitter.com/SsUIhCgeku

— Parthu Potluri (@Parthu_Potluri) June 18, 2019

The request asks AAI/Textron, G.D., and Sig Sauer each to supply 53 rifles, 43 automatic rifles and 850,000 rounds of ammunition for the 27-month test. The Army is expected to wrap up the test in 1H22 when it’s expected to announce the winning design. By 2H22, the Army could start fielding the new weapons to combat units.

NGSW weapons won’t initially replace all M4 carbine and M249 light machine guns but will be given to infantry and special operation forces first.

The 27-month test will include “soldier touchpoint” tests that evaluate “mobility and maneuverability on Army relevant obstacles, and user acceptance scenario testing,” the Army says.

The Army is expected to test each weapon’s round for ballistic effectiveness under simulated combat conditions. There’s a chance in the latter parts of the test, the weapons could be tested in a war zone.

“These evaluations may be conducted with multiple squads,” the Army added.

The NGSW program has been centered around a weapon that can support a new 6.8mm bullet.

AAI/Textron is seen as the leader in the NGSW since it has spent more than a decade developing its 6.8mm cased-telescoped round.

“We have assembled a team that understands and can deliver on the rigorous requirements for this U.S. Army program with mature and capable technology, reliable program execution and dedicated user support,” says Wayne Prender, Textron Systems’ Senior Vice President, Applied Technologies and Advanced Programs.

“Together, we are honored to support America’s soldiers with the next-generation capabilities they need in their most dangerous missions.”

The Pentagon’s current shift from urban warfare in Iraq and Syria to the mountains and open terrain of Afghanistan have been the driving force behind modernizing standard issue weapons for infantry units. While standard rifles are well-suited for close combat in cities like Mosul and Raqqa, it lacks the range to kill adversaries in open stretches.

AAI/Textron will likely secure the contract for NGSW by 1H22. The contract could be as large as 250,000 weapons and 150 million rounds for the first order.

Submitted by Eric Peters, CIO of One River Asset Management

“Judging by bond markets around the world, economic Armageddon – or something awfully close to it – is just around the corner.” – SocGen, September 5, 2019

“It’s difficult to describe markets,” said the CIO, reflecting on his decades of trading. “For what seems like forever, markets behaved in ways that reflected shifting expectations about central bank activity, economic trends, and profit potential, but that’s changing,” he said. “Now markets shift direction on a tweet then reverse on some comment. And nearly all of it is political.” But even politics are different now.

“Yet through it all, global interest rates are collapsing like an economic calamity looms.” 

* * *

“It is a bowl of water that might help put out a fire that has just started,” said young Jimmy Sham, describing Carrie Lam’s withdrawal of Beijing’s extradition legislation. “But it is now useless in the face of what has become a forest fire,” continued Jimmy, one of many leaders in Hong Kong’s burning rebellion. Naturally, the government hopes that by meeting the protestor’s principal demand, cries for further action will soften.

But that’s not how crowds work. Hong Kong’s emboldened freedom fighters have another four demands to go. Behind them lay more still. And far in the distance, beyond the event horizon, lay their ultimate objective, barely spoken of today, democratic revolution in China.

“Public discontent extends far beyond the bill,” conceded Carrie Lam, exuding a manufactured calm, withdrawing the bill, “It covers political, economic and social issues, including problems relating to housing and land supply, income distribution, social justice and mobility.” No doubt she’s right.

All revolutions are sparked by such failures of government. But this one goes further. Hong Kong will fully revert to Chinese rule in 28 years, which means its citizens will be subjected to Beijing’s political oppression. Today’s young protestors will suffer its retribution as they enter middle age, images of their rebellious youth forever swirling in servers. The only hope for Hong Kong’s young freedom fighters is a Chinese political revolution between now and 2047. And with that inferno as their only escape, each concession by Carrie Lam’s government will be met with calls for another, then another.

Just as each central bank rate cut is followed by the market’s demand for another, then another. It’s what has begun in the US. And what will soon start in Europe. With central bankers in both economies cutting rates, exuding a manufactured calm, when in fact they’re terrified that what little they have left will be useless in the face of a forest fire.

* * *

The clock is ticking, he thought, gazing out at 35,000 feet. Above was the most perfect blue. Far below, concealed by clouds, lay Hong Kong. In tumult. He’d always admired the rebels, the risk takers. They’re our salvation, our liberators, without them nothing changes. And since the protests had started, he marveled at the brave young souls who dare defy Beijing and its puppet, Carrie Lam.

The British returned Hong Kong to the Chinese in 1997 under Deng Xiaoping’s ‘one country, two systems’ principle, which enshrined capitalism, rule of law, and certain rights and freedoms for fifty years. That seemed like a long time. And back in 1997, conventional wisdom assumed democracy was the destiny of all great nations – so every effort was made to integrate China into the global trading system to speed their political transformation.

But twenty-two years in, Western democracies in shambles, China’s unparalleled economic ascent allowed the communist party dictatorship to consolidate power, strengthen its grip, spread its gospel. Beijing’s ‘Made in China 2025’ economic plan is advancing its dominance of tomorrow’s technologies. Its ‘Belt and Road’ initiative is extending its global influence. And while these are slow moving efforts, barely visible to the world in any given month or year, for Hong Kong (and Macau) the clock is ticking.

Its citizens are unique – of all the people in the world only they can be certain that if they do not rebel, they’ll lose their freedom in 2047. It has sharpened their minds. And it should sharpen ours too. Throughout the West, we should be equally terrified of losing our freedom. Without a sustained struggle to maintain our privacy and civil liberties, the creep of today’s surveillance state (and surveillance corporations) will consume us, control us, quieting tomorrow’s rebels, crushing our risk takers, before they can save us from tyranny.

So here we go again, another depressing story from Baltimore City, a region that is imploding on itself and suffering from a murders crisis, opioid epidemic, a wide gap in wealth/health/education inequalities, and deindustrialization. 

In this report, we’re only going to focus on the murder crisis and gently touch on the opioid epidemic (because they go hand in hand), however, please search our archives for other stories on Baltimore, because the implosion there is what will be coming to many other inner cities across the country in the 2020s. 

With that being said, Baltimore City could be on track to surpass last year’s 309 homicides, and if current trends persist, there is a chance that homicides could hit a record high, which means the city could see 342, a level that was previously set in 2015 and 2017. 

“Baltimore is on course to reach more than 300 homicides for the fifth year in a row, with 232 killings through Wednesday compared to 199 at the same time last year,” The Baltimore Sun said.

To combat the murder crisis, the federal government and Baltimore City Police unveiled a permanent “strike force” comprised of detectives, prosecutors, and federal agents will begin operations to target Baltimore drug gangs and their Mexican suppliers, who have been flooding the city with heroin and fentanyl.

No details were provided if the strike force will target hospitals and pharmaceutical companies who continue pumping legal opioids onto the streets. Legal opioids kicked off the opioid crisis across the city several decades ago, not Baltimore gangs and their Latin American suppliers.

As shown in the chart below, cumulative homicide trends are likely to record the 5th consecutive year of murders over 300. 

The next chart shows most of the homicides this year have been caused by a gun. 

Geographically speaking, the killings aren’t situated in just one part of the town but are more widespread.

Last week, we reported how one neighborhood in the city transformed into a warzone. We said: “There was so much gunfire at one point that not even a single rat was spotted on the streets of East Baltimore City.” 

🚨Officer Down🚨 Officer struck by gunfire in Baltimore during pursuit as innocent civilians jump for cover during the shooting. If you see Officers pointing their weapons at a suspect, please get out of the line of fire. Find a safe place if you really need to record. pic.twitter.com/OKD6aAWZsq

— Sgt.Helper (@1Cycle20) August 29, 2019

On a per-capita basis, Baltimore’s homicide rate is the highest in the country and is on par with a war zone.

We said this last week, and we’ll repeat it: “There’s no meaningful policy in place to turn Baltimore around in the next decade. So in the meantime, if you value your life, stay away from Baltimore.”