The Hidden Reason The Primary Debates Seem Extra Crazy This Year

Authored by Jeffrey Tucker via The American Institute for Economic Research,

This is a remarkable story of how the best-laid plans produced results that no one anticipated, with profound consequences for the Democratic Party. 

For many viewers in television land, the spectacle has been bizarre. The 20 or so contenders for the Democratic nomination have not only become outlandishly left-wing (“Left vs. Crazy Left,” as Kimberley A. Strassel says). It’s worse: they’ve been performing in ever stranger ways: shorter soundbites, edgier clips, and punchier attacks, with be-bop-style delivery. It’s almost like they are trying to get a five-second Twitter video to go viral, something to rile up lefty activists so the stuff will spread as far and wide on social media as possible. 

It seems that way because it is that way. 

Gone are the days of town halls in Iowa – you know, sitting around the diner talking with the locals about how great corn subsidies are. Now the contenders spend all their time in Washington and New York in rehearsal practicing couplets in front of consultants, so they can make a splash on national news between the debates. 

It seems almost like they have all given up on coherence and rationality, to say nothing of normal good sense. Listening to their rhetoric, there is nothing government can’t do if we just give this one person power to overthrow the capitalist system. Up with taxes, down with the wealthy, onward with central planning, out with fossil fuels, to heck with private provision of medical services. 

This whole trajectory is not what one would predict in a country that in general tends center right in its political outlook. As Scott Rasmussen notes

Only 18% of voters share Warren’s enthusiasm for banning private health insurance companies. Only 26% think illegal immigrants should receive health care subsidies from the federal government. Fewer than one-in-five believe the threat of climate change makes it necessary to give the federal government sweeping new powers to control the economy.

You would think that politicians would try not to favor ideas vast majorities reject. What are these candidates thinking? What’s going on here? Surely the high-end professionals running these campaigns know that they can’t win in the general election this way. 

It’s the Debate Rules 

For me, the mystery lasted until I heard the New York Times podcast on August 2, 2019. It made some sense out of nonsense. It zeroed in on the way a number of forces have combined to drive the party to far-left extremism. It’s a case study in how bad rules lead to perverse outcomes. 

The thesis is as follows. 

First, the media-driven political culture – on the march for half a century – has made the debates everything that matters. That’s the first condition to understand by way of explanation. This is a necessary condition, but it is not a sufficient one. 

Second, the Democratic National Committee is trying not to repeat the 2016 perception that the fix was in with the selection of Hillary Clinton. That really rubbed many activists the wrong way. Plus, it didn’t work. Despite a 90-plus percent chance of winning, Clinton lost. So the party wanted a very clear presentation of an open forum. Come one, come all! 

Third, and as a result, far more candidates threw a hat into the ring than was expected, which meant that they had to cap the number at 20 and further allocate television time; hence, the seemingly rational rules for qualification. They had to create a rationing system based on broad support. 

The rules seemed sensible. As Politico summarized:

“There are two paths to qualifying for the debate stage: breaking 1 percent in three polls from pollsters approved by the Democratic National Committee, or tallying 65,000 unique campaign donors, with at least 200 donors in 20 different states.”

Grass roots! Organic support from people from many states! What could go wrong?

Instead of finding supporters in early primary states by going door-to-door, the candidates instead were forced to run a national campaign of small donors. But it takes a lot of money to buy the necessary social media ads to push people into donating $1 to qualify as a real donor. 

This meant seeking huge donors to fund expensive ad buys. They pay on average $70 to get a $1 donation from as many people as possible. Who gives $1 to a candidate: you guessed it, the extremist activists who just happen also to be financially poor, also known as The Twitter Mob. In order to get them to throw a buck at you, you need to inspire silly activists, as many as possible. That in turn means that you have to reduce your campaign to silly slogans activists like in order to get their attention.

Then on top of that, the standards keep tightening as the debates go on. There are so many candidates that they only get one minute. So their soundbites have to be extra catchy to be broadcast the next day on as many channels as possible in order to maximize more $1 contributions. This means they have to attack each other ever more, from the left, left, left, in order to get the goofballs to open their wallets.

Hence a rational candidate from a place like Montana with no national media following is toast from the very outset. This means, under these rules, there will be no more Carters, Clintons, or Obamas. They were all outsiders without a national name until they performed well in the primaries. That system has been blown up, all because of a strange voting rule designed to allocate television time.

Good Intentions, Nutty Results

This is a remarkable case of how a hastily drafted voting rule unintentionally drove the whole Democratic field to a wacky level of ideological extremism that nearly guarantees they will lose a national election. Everyone knows it, most everyone is against it, but no one can stop it.

Here is a classic example of the unintended consequences of a seemingly well-constructed plan. What happened? The opposite of what was intended. Lots of small donors require a handful of large donors to fund ad buys. A national base excludes local focus. This national base must be inspired by zippy-wild left-wing ideas. Hence the hoped-for moderation inadvertently turned into a competition between people moving ever further left without limit. 

In other words, these seemingly rational rules – combined with a media-driven campaign – resulted in the very inverse of what the planners wanted. With some sympathy toward those who made this mess, I’m sure I couldn’t have anticipated these results. No one did. 

Think of it this way. The smart guys at the Democratic National Convention were trying to structure a quasi-market out of candidate popularity, a foolproof system to cause the most meritorious candidates with the best ideas with the broadest appeal to rise to the top. Instead the system blew up and fell apart, leaving a pack of wackadoodles dancing to socialist teen-pop in the hope of getting one-dollar bills thrown at them by a Twitter mob. 

But now it is too late. Moderate candidates with complex answers who might have stood a chance of being a rational alternative to the GOP ticket are already toast. And we are left with a slate of candidates easily painted as our own Red Guard. 

And there are ten more debates to go! 

As for the Democratic National Committee, these are certainly not the people who are likely to succeed at designing and managing an entire economy – not when they can’t figure out how to design and manage a primary campaign just to get the party nomination. 

via ZeroHedge News https://ift.tt/2T6fvaL Tyler Durden

“Never Say Never”: Avenatti Reconsiders Run For 2020 Democratic Nomination

Michael Avenatti might be facing a lengthy prison sentence if he’s ultimately convicted of trying to extort millions of dollars, but that apparently isn’t stopping him from throwing his hat into the ring for the 2020 nomination.

CNBC reports that Avenatti is considering a run for the 2020 Democratic nomination for president after he declared last year that he wouldn’t be running following a string of scandals.

Avenatti, who infamously represented porn star Stormy Daniels in her case against President Trump and his former fixer Michael Cohen, is already raising money for his campaign.

Before suspending his campaign, Avenatti was raising money through his own political action committee, The Fight PAC. Data collected by the nonpartisan Center for Responsive Politics shows that the committee spent $25,000 on Break Something LLC, a major Democratic consulting firm.

The PAC spent $13,000 on plane flights and more than $5,000 on hotels. The PAC is still active, and has raised over $20,000 so far this cycle, according to its latest FEC filing. It currently has $3,540 on hand.

After watching the first two Democratic debates, Avenatti said he doesn’t think the Democrats have the fighter that can take on Trump during the general election.

“Never say never,” Avenatti said when asked about his plans for the race. “The Dems need a non-traditional fighter. They have a lot of talent but not a lot of fighters.”

He later noted that the odds of him getting into the race are at 50/50 and he could make his decision in a few months.

“I don’t think I need to make a final decision for a number of months. I have the name ID and everyone knows I’m one of the few effective fighters that the Dems have,” he said.

Avenatti released a statement on his twitter feed.

via ZeroHedge News https://ift.tt/2MB1jWb Tyler Durden

Hell’s Top Banker Explains “How To Destroy The Global Economy”

Bill Blain’s new book, The Fifth Horseman – How to Destroy the Global Economy, has been attracting much comment. It’s a tongue-in-cheek polemical sideswipe at Central Bankers, Regulators and Politicians for the poor and mistaken policies that have fuelled the ongoing global financial crisis since 2017.

Blain’s book claims to be a hack of emails and documents exchanged between Hell’s top banker and his boss as they plan to extend the crisis they created in 2007 and make it worse… Here is an excerpt…

(Edited version of the speech given by the TJ Wormwood, Chief Demonic Officer – Finance, Lord of 3rd Ring of the 7th Circle, to invited audience at Davos.)

Dear Colleagues,

As you all know, I’ve been wrecking finance for millennia. [Pause for effect]

Nearly every major big idea, evolutionary leap forward, invention and discovery has improved the miserable lot of mankind only through their ability to monetise it. Forget the theft of fire – being able to monetise fire by attracting pretty and willing mates around a warm campfire, or cooking the food others have hunted, is what mattered. Strip out the noise, and the rise of mankind is largely due to improvements in the efficiency and ease of means of exchange.

From the realisation hunters could barter their furs for other goods, to the rise of complex products to finance global growth – the innovation of financial markets has been a major driver of success for the Other Side in raising the wellbeing and prosperity of mankind. Pretty much anything that holds back or disrupts trade, increases costs and holds back services is naturally positive for our goal of global destabilisation.

So, here is the big plan:

Since 2007 we’ve been turning the Other Side’s successful innovation of financial markets against them. Global Financial Markets are incredibly rich in opportunities to distort truth, hide lies, and undermine mankind – generating immediate greed, envy, suspicion and anger. We’ve uncovered previously unimaginable ways in which to financially screw the World with consequences that impact everyone.

We’ve overlaid the programme with our mastery and understanding of temptation, human greed, avarice and pride, while adding subtlety and cunning. We merely suggest and advise. We are facilitating the train-wreck of the global economy by destroying asset values while confounding their understanding of money and wealth – the pillars of their society.

At its simplest form we are manipulating and driving constant market instability to keep mankind distracted. Uncertainty clouds their future expectations – so we keep it raining. A Mortgage crisis one year, followed by a Sovereign Debt crisis the next, spiced with a couple of bank failures, and threats of global trade war. Overlay with confusion and distraction such as social media, fake news, Bitcoin and populism, and it all works rather well.

Keep their leaders arguing.  Keep the blame game going. 

Our success can be seen in current financial asset prices. These are now hopelessly inflated and distorted by foolish post financial crisis policy decisions. They are bubbles set to pop. Empower the regulators and bureaucrats to compromise finance through zealous over-regulation, making banking safer by destroying it. Usher in a new era of trade protectionism, the end of Free Trade and increase the suspicion some countries are manipulating their currencies for economic advantage. Sprinkle some dust of political catastrophe, the collapse of law, undo the fair, just and caring society, while adding some eye of newt and complex environmental threats. Make the rich so rich they don’t notice, and the poor so poor they become invisible. If the markets remain uncertain, then it distracts mankind from addressing these issues, making society less stable!

There as some things we’re really proud of, including the Euro, Social Media, Investment Banks, the Tech Boom, and especially Quantitative Easing (which is still delivering confusion and pain). New Monetary Theory could prove even better – it shows tremendous potential to thoroughly unsettle confidence in money. Cybercurrencies are particularly fun – despite coming up with the idea, neither we, nor even the distinguished members of our panel of eternal guests, understand the why of them. They are libertarian nonsense – so, naturally we continue to encourage them as get-rich-quick schemes, but they also further undermine confidence in money and government. We made something up in a bar one night and called it a Distributed Ledger – the humans ran with it and invented Blockchain, whatever that might be..

Some of the other stuff we’ve encouraged, such as The EU, ETFs, Hi-Frequency Trading, Neil Woodford and Deutsche Bank look likely to be highly effective vectors of short-term economic destruction and destabilisation, triggering systemic market events and regulatory backlashes across markets. We are only now exploring the full potential of market illiquidity to rob billions of pensioners of their savings.

We’ve persuaded investors to overturn proven tried and tested investment strategies and wisdoms, nurturing a whole range of overpriced unprofitable US Tech “Unicorn” companies which we are confident will prove utterly over-hyped and largely worthless. The success of social media, data mining and new tech has increased levels of dissatisfaction and envy – especially in our target younger demography.

The way we successfully pinned the blame on banks for the Global Financial Crisis – despite the fact it was people who wanted mortgages to buy houses and fast cars – ensured global regulators would over-react. We’ve allowed regulators to focus on banks while we target the next financial crisis in other parts of the financial ecosystem.

Regulators forced the banks to de-risk. But risk does not disappear – it just goes somewhere else. While banks understood risk and had massive staffs to manage risk, risk is now concentrated in the hands of “investment managers” who are singularly ill-equipped to withstand the next credit crunch and global recession, (which we’ve planned for next October – Save the Date cards have been sent).

We are particularly pleased that many banks now exceed the 2.3 compliance officers for every profitable banker ratio. Compliance and regulatory costs now exceed 10% of income at some European banks – a stunning success and substantially decreasing the efficiency of banking and exchanges.

We’ve some great new financial ideas we are still experimenting with, some of which show great promise for further weakening society. Facebook Money is going to be a cracker, and I particularly like the Spaceship to Mars project… if only they knew what awaits them…

By hiding inflation in the stock market, we assisted the accumulation of massive wealth by a tiny percentage of the population to ferment income inequality dissatisfaction. When capital is concentrated and the workers under the cosh, it creates all the right conditions for weak disjointed government to aid and abet the rise of destabilising populism.

It’s highly satisfying to watch the instability we’ve created in financial markets drive fear and distrust across society. The debt crisis we engineered led to global financial austerity, job insecurity, and rising inequality. We were surprised how easily we pushed the Gig economy concept to further exploit and cow workers through regulators and authorities – they barely noticed. Over this we’ve layered whole new levels of anxiety such as the unknowns of data theft, the rise in envy coefficients through social media, fake news while fuelling social distrust through resentment.

We’ve managed to persuade Governments to follow damaging and contradictory policies. As society reeled in the wake of the financial crisis, we persuaded policy makers to cut back spending through “austerity” spending programmes, simultaneously bailing out bankers while flooding the financial economy with free money through Quantitative Easing.

Effectively we’ve split the world into two economies. A real economy which is sad, miserable and deflating, and a financial economy that’s insanely optimistic, massively inflated and ripe to pop on the back of free money.

The resentment, instability, fear and general sense of decay has paid dividends in our drive to break society by undermining the credibility of the political classes. Our approach to politics has been simple – deskill the political classes, reduce their effectiveness as leaders, while engineering economic, social and financial instability to drive rampaging populist politics – just like in 1932! Populism may ultimately prove short-lived, but it’s difficult to see how the political classes will recover their power in time to reverse the damages being done to the global environment.

While markets have burned, society become increasingly riven, and politics has failed, we’ve distracted the humans from the rising levels of carbon dioxide in the atmosphere which threatens to create global warming and rising sea levels, while plastics poison the oceans and soil erosion threatens agriculture.

Now I love the ravenous hunger and sharp pointy teeth of polar bears as much as the next demon, but needs must… needs must. I was also rather fond of the dinosaurs…

Our approach to ensuring destructive climate change has proved very effective. We’ve supported, financed and advised the loudest green lobbies to ensure their message looks ill-considered, wrong and economic suicide. We also paid big bucks to fund the loudest climate change deniers. Our innovation of fake news to discredit and mitigate anything positive means climate change remains a crank topic – even as our polar bears drown.

Meanwhile, through our dominance of global boardrooms and investment firms, we’ve made sure that large corporates have bought-out and stifled new technologies that could solve the environmental crisis.

Our future looks great – because their future is bleak!

Thank you for your kind attention.

TJ Wormwood,

Demonic Chief Office – Finance

*  *  *

You can get your personally pixelated copy on Kindle or as a Paperback on Amazon. For less than the price of a couple of pints, you are guaranteed at least 2 laughs.. unless you are Neil Woodford or work for Deutsche or Goldman. Go on… you know it makes sense…

via ZeroHedge News https://ift.tt/339YhOs Tyler Durden

Hong Kong Police Fire Tear Gas As Peaceful Protest Turns Chaotic

As a peaceful Saturday demonstration spiraled into chaos, Hong Kong police have fired tear gas at anti-government activists who have been protesting for nine weeks against a controversial bill which would have allowed people to be extradited to mainland China to stand trial. 

Photos via SCMP

Protesters donning hard-hats, masks and other gear could be seen hurling bricks at the Tsim Sha Tsui Police Station in Mong Kok province, while others set fire to garbage cans and other debris in the streets, according to SCMP.  

Protesters could be seen hurling bricks at the Mong Kok province police station, while others vandalized walls, vehicles and lamp posts.  

A day after thousands of civil servants took to the streets in Central to urge authorities to give in to protesters’ demands, people gathered on Saturday for an approved rally in the shopping hub of Mong Kok, but which soon splintered off into different directions, ending in clashes in Mong Kok and Tsim Sha Tsui as police used tear gas. 

Outside Tsim Sha Tsui Police Station, some had hurled bricks into its car park, while others vandalised vehicles and lamp posts. The force said it had issued a warning for the crowd to leave before firing rounds of tear gas. 

Earlier, protesters marched all the way to the Cross-Harbour Tunnel, briefly blocking it and bringing traffic to a halt, before circling back to Mong Kok and Tsim Sha Tsui. Along sections of the main thoroughfare Nathan Road, some set up barricades and geared up with helmets and masks as night fell. –SCMP

According to reports, thousands of civil servants have defied government orders not to join the protests – and were met with applause from Hong Kong residents as they took to major roads in the heart of the city’s business district.  

“I think the government should respond to the demands, instead of pushing the police to the frontline as a shield,” 26-year-old government worker Kathy Yip told Reuters.

Protesters are also demanding that the government look into allegations of police abusing their power, as well as a full withdrawal of the extradition bill, which has only been suspended for now. They are also demanding that all arrested protesters be exonerated, along with the implementation of universal sufferage and that the government stop referring to their demonstrations as riots. 

Will China intervene?

As we reported on FridayBloomberg thinks that the Chiense military could soon intervene after reports emerged last week that Chinese security forces had amassed just outside the semi-autonomous city. TThis was followed by the chief of the Chinese military garrison in Hong Kong warning this week that the army stands ready to “protect” Chinese sovereignty.

Chinese military officials, and especially state media have begun floating the argument for “military options” and intervention. Officials also recently described the US as a “black hand” behind the anti-Beijing protests – which began over a proposed extradition bill – something which the US state department dismissed as “ridiculous”. 

According to the Bloomberg report, “A senior Trump administration official told reporters Tuesday that the White House was monitoring a congregation of Chinese troops or armed police gathering across the mainland border from Hong Kong. The nature of the build-up was unclear, and the report coincided with a swearing-in ceremony for 19,000 officers in the neighboring province of Guangdong.

If Chinese security forces do intervene in the Hong Kong protests, the “worst-case scenario” would likely include a declaration of martial law or a state of emergency, while intervention from Beijing could also prompt the US to rescind Hong Kong’s preferential trading designation. 

“There may be a possibility that they need to call for the PLA,” according to Kevin Lai, an economist at Daiwa Capital Markets Hong Kong Ltd., who added that the odds are still low. “If they do that, it would be very negative for Hong Kong.”

China’s new UN reprsentative, Zhang Jun, meanwhile, appeared to suggest that action from Beijing was imminent – saying that the protests in Hong Kong are “really turning out to be chaotic and violent and we should no longer allow them to continue this reprehensible behavior.”

via ZeroHedge News https://ift.tt/339j1WI Tyler Durden

Do You Hear A Bell Ringing?

Authored by EconomicPrism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,

Do You Hear a Bell Ringing?

The sun shines brightest across the North American continent as we enter summer’s dog days.  Cold sweet lemonade is the refreshment of choice at ballparks and swimming holes alike.  Many people drink it after cutting the grass, or whenever else a respite from the heat and some thirst quenching satisfaction is needed.

The economy, after 10 years of growth, appears to be heading for a respite too.  Second quarter earnings, currently being reported by S&P 500 companies, have been a mixed bag thus far.  But in sectors that actually make stuff, like materials and industrials, earnings are suffering double digit declines.

Regardless of whether companies were able to “beat estimates” (which as often happens, were revised lower just before the reporting season started), their actual Q2 results didn’t look very encouraging so far. The manufacturing sector in particular looks a bit frayed around the edges as the saying goes. [PT]

From a practical standpoint, earnings are declining in these sectors because manufacturing is contracting.  For example, this week it was reported that the Chicago Purchasing Mangers’ Index (PMI) collapsed in July to 44.4.  That is the second weakest Chicago PMI reading since the Great Financial Crisis.

For context, a Chicago PMI reading below 50 indicates a contraction of the manufacturing sector in the Chicago region.  So far this year, the Chicago PMI has been down five out of seven months.  On top of that, weaker demand and production pushed the employment indicator into contraction for the first time since October 2017.

Chicago PMI – based on this indicator it looks as though the economy either has already entered a recession or is very close to doing so. Occasionally dips in the Chicago PMI do not presage a recession – as for example in late 2015/ early 2016. It remains to be seen if the signal is more meaningful this time, but it definitely constitutes a warning sign. [PT]

Unfortunately, the weakness in manufacturing extends beyond the Chicago region.  On Thursday it was reported that the U.S. Manufacturing PMI dropped in July to its lowest level since September 2009.  Employment also fell for the first time since June 2013.  What is going on?

US manufacturing PMI by Markit and the ISM manufacturing survey. These still indicate expansion, but are on the cusp of moving into contraction territory. Note: in terms of gross output, manufacturing remains the largest sector of the economy. [PT]

Economic Lemons

One place to look for edification is the auto industry.  Namely, car dealers are reporting fewer buyers. They are in turn ordering fewer vehicles from manufacturers. The dealers don’t have room for the cars they have.  Automakers, parts manufacturers and dealers directly employ more than two million people.  As demand for cars declines, the jobs associated with the auto industry also decline.

Having too many cars with too few buyers is something an economist would call a supply glut.  Of course, the easiest way to clear excess supply is to reduce prices.  This may work up to a point.  But if prices must be reduced beyond the cost of labor and materials inputs, there is a problem.

Making lemonade from these economic lemons is generally impossible.  Still, that doesn’t mean companies don’t try by taking on greater and greater levels of debt.  And the big banks, which are backstopped by the Fed, continue extending credit to keep the sham going.

U.S. non-financial corporate debt is about $10 trillion, or roughly 48 percent of gross domestic product (GDP).  That is up about 52 percent from its last peak in the third quarter of 2008, when corporate debt was about $6.6 trillion, roughly 44 percent of 2008 GDP.  In short, corporate debt is at record levels and is rising much faster than economic output.

US non-financial corporate debt is approaching USD 10 trillion. The corporate sector is not exactly prepared for an economic downturn.  [PT]

At this point in the business cycle, corporations have loaded themselves up with so much debt that they are extremely fragile.  Should the economy slow ever so slightly, it will be game over for countless over-leveraged companies. Defaults will pile up like old furniture and tires along the dry LA River bed.

Do You Hear a Bell Ringing?

But while Main Street has been cooling off, Wall Street has been running hot.  Promises of more cheap credit from the Fed have propelled stocks to record highs. Year-to-date, stocks, as measured by the S&P 500, are up over 17 percent.

On Wednesday, however, some uncertainty was added to the market. At the conclusion of the July Federal Open Market Committee (FOMC) meeting, Fed Chair Powell cut the federal funds rate 25 basis points.  But instead of telegraphing that additional rate cuts would follow like Wall Street expected, Powell said it was merely a mid-cycle adjustment.  In other words, he’s winging it.

S&P 500 Index, daily: a minor disturbance in the farce. This was the first time since 1987 that the index actually decline on the very day the first rate cut was announced. [PT]

Will the Fed cut rates further this year?  Will they hold?  These were the questions Wall Street was asking on Wednesday afternoon as the S&P 500 closed down 36 points.

Yesterday, after sleeping on the Fed’s ambivalence, traders showed up to work with focus and intent.  They bought the dip with confidence.  And everything was great until about mid-day.  The S&P 500 was up 33 points – and then something unexpected happened.

President Trump, via Twitter, dropped a turd in a crowded swimming pool:

“…the U.S. will start, on September 1st, putting a small additional tariff of 10% on the remaining 300 billion dollars of goods and products coming from China into our country.  This does not include the 250 billion dollars already tariffed at 25%.”

The market gets whacked by the God Emperor… [PT]

Following Trump’s tweet, Wall Street freaked out.  The S&P 500 dropped 68 points, ending the day at 2,953.

No one rings a bell at the top of the market,” says the old Wall Street adage. Make of this week’s manifestations what you will. We hear a bell ringing. Do you?

via ZeroHedge News https://ift.tt/2Kr5v8l Tyler Durden

Do You Hear A Bell Ringing?

Authored by EconomicPrism’s MN Gordon, annotated by Acting-Man’s Pater Tenebrarum,

Do You Hear a Bell Ringing?

The sun shines brightest across the North American continent as we enter summer’s dog days.  Cold sweet lemonade is the refreshment of choice at ballparks and swimming holes alike.  Many people drink it after cutting the grass, or whenever else a respite from the heat and some thirst quenching satisfaction is needed.

The economy, after 10 years of growth, appears to be heading for a respite too.  Second quarter earnings, currently being reported by S&P 500 companies, have been a mixed bag thus far.  But in sectors that actually make stuff, like materials and industrials, earnings are suffering double digit declines.

Regardless of whether companies were able to “beat estimates” (which as often happens, were revised lower just before the reporting season started), their actual Q2 results didn’t look very encouraging so far. The manufacturing sector in particular looks a bit frayed around the edges as the saying goes. [PT]

From a practical standpoint, earnings are declining in these sectors because manufacturing is contracting.  For example, this week it was reported that the Chicago Purchasing Mangers’ Index (PMI) collapsed in July to 44.4.  That is the second weakest Chicago PMI reading since the Great Financial Crisis.

For context, a Chicago PMI reading below 50 indicates a contraction of the manufacturing sector in the Chicago region.  So far this year, the Chicago PMI has been down five out of seven months.  On top of that, weaker demand and production pushed the employment indicator into contraction for the first time since October 2017.

Chicago PMI – based on this indicator it looks as though the economy either has already entered a recession or is very close to doing so. Occasionally dips in the Chicago PMI do not presage a recession – as for example in late 2015/ early 2016. It remains to be seen if the signal is more meaningful this time, but it definitely constitutes a warning sign. [PT]

Unfortunately, the weakness in manufacturing extends beyond the Chicago region.  On Thursday it was reported that the U.S. Manufacturing PMI dropped in July to its lowest level since September 2009.  Employment also fell for the first time since June 2013.  What is going on?

US manufacturing PMI by Markit and the ISM manufacturing survey. These still indicate expansion, but are on the cusp of moving into contraction territory. Note: in terms of gross output, manufacturing remains the largest sector of the economy. [PT]

Economic Lemons

One place to look for edification is the auto industry.  Namely, car dealers are reporting fewer buyers. They are in turn ordering fewer vehicles from manufacturers. The dealers don’t have room for the cars they have.  Automakers, parts manufacturers and dealers directly employ more than two million people.  As demand for cars declines, the jobs associated with the auto industry also decline.

Having too many cars with too few buyers is something an economist would call a supply glut.  Of course, the easiest way to clear excess supply is to reduce prices.  This may work up to a point.  But if prices must be reduced beyond the cost of labor and materials inputs, there is a problem.

Making lemonade from these economic lemons is generally impossible.  Still, that doesn’t mean companies don’t try by taking on greater and greater levels of debt.  And the big banks, which are backstopped by the Fed, continue extending credit to keep the sham going.

U.S. non-financial corporate debt is about $10 trillion, or roughly 48 percent of gross domestic product (GDP).  That is up about 52 percent from its last peak in the third quarter of 2008, when corporate debt was about $6.6 trillion, roughly 44 percent of 2008 GDP.  In short, corporate debt is at record levels and is rising much faster than economic output.

US non-financial corporate debt is approaching USD 10 trillion. The corporate sector is not exactly prepared for an economic downturn.  [PT]

At this point in the business cycle, corporations have loaded themselves up with so much debt that they are extremely fragile.  Should the economy slow ever so slightly, it will be game over for countless over-leveraged companies. Defaults will pile up like old furniture and tires along the dry LA River bed.

Do You Hear a Bell Ringing?

But while Main Street has been cooling off, Wall Street has been running hot.  Promises of more cheap credit from the Fed have propelled stocks to record highs. Year-to-date, stocks, as measured by the S&P 500, are up over 17 percent.

On Wednesday, however, some uncertainty was added to the market. At the conclusion of the July Federal Open Market Committee (FOMC) meeting, Fed Chair Powell cut the federal funds rate 25 basis points.  But instead of telegraphing that additional rate cuts would follow like Wall Street expected, Powell said it was merely a mid-cycle adjustment.  In other words, he’s winging it.

S&P 500 Index, daily: a minor disturbance in the farce. This was the first time since 1987 that the index actually decline on the very day the first rate cut was announced. [PT]

Will the Fed cut rates further this year?  Will they hold?  These were the questions Wall Street was asking on Wednesday afternoon as the S&P 500 closed down 36 points.

Yesterday, after sleeping on the Fed’s ambivalence, traders showed up to work with focus and intent.  They bought the dip with confidence.  And everything was great until about mid-day.  The S&P 500 was up 33 points – and then something unexpected happened.

President Trump, via Twitter, dropped a turd in a crowded swimming pool:

“…the U.S. will start, on September 1st, putting a small additional tariff of 10% on the remaining 300 billion dollars of goods and products coming from China into our country.  This does not include the 250 billion dollars already tariffed at 25%.”

The market gets whacked by the God Emperor… [PT]

Following Trump’s tweet, Wall Street freaked out.  The S&P 500 dropped 68 points, ending the day at 2,953.

No one rings a bell at the top of the market,” says the old Wall Street adage. Make of this week’s manifestations what you will. We hear a bell ringing. Do you?

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Berkshire Overtakes Apple In Record Cash Holdings Despite Unexpected Profit Drop

There is a new cash king in town.

Just a few days after we reported that Apple’s once gargantuan cash hoard (net of debt) has tumbled from a record high of $163BN at the end of 2017 to just $102 billion at Q2, after aggressively funding tens of billions in buybacks and dividends, so much so that in the second quarter Google’s net cash of $107 billion surpassed AAPL for the first time ever…

… it is now Berkshire’s turn to also upstage the former cash giant, with Buffett’s sprawling conglomerate reporting a record $122.4 billion in cash at the end of the second quarter, rising above its prior cash record of $116 billion in 2017.

reflecting Buffett’s nearly 4-year drought in finding major acquisition opportunities since buying Precision Castparts. As Bloomberg notes, Buffett has been struggling to find enough well-priced opportunities to keep up the growth that allowed him to beat broader markets for decades.

And speaking of Berkshire’s lack of growth which has resulted in its Class B stock declining 0.7% this year , significantly underperforming the market and 10% below their peak last October,  it was on full display in the just completed second quarter, in which Berkshire’s operating profit fell more than expected, declining 11% to $6.14 billion, or roughly $3,757 per Class A share, from $6.89 billion, or roughly $4,190 per Class A share, a year earlier. Analysts were expecting an operating profit of $3,851.28 per share.

Operating earnings declined as Berkshire’s auto insurer Geico suffered a larger number of accident claims, while competition from foreign producers, lower imports and “trade policy” dampened cargo volumes for consumer and agricultural products at its BNSF railroad, Reuters noted. Earnings also barely budged at Berkshire’s manufacturing businesses, where U.S. tariffs hurt sales of gas turbine and pipe products at its Precision Castparts unit, and its service and retailing businesses.

Some more details:

  • Buffett’s railroad generated a modest profit in the quarter, bolstered by shipments of industrial products.  BNSF’s profit rose 2% to $1.34 billion, while revenue was essentially unchanged.  Profit was also flat in Berkshire’s manufacturing, services and retailing businesses, totaling $2.49 billion. That could help bat down concerns about its ability to weather a slowdown in the sector.
  • On the flip side, underwriting income at Berkshire’s insurers fell by almost 63% to $353 million. The life and health business at Berkshire’s namesake reinsurance group changed a contract with a major U.S. reinsurer, which reduced the earned premiums it raked in. Geico’s pre-tax underwriting gain fell 42%, as a higher ratio of loss claims to premiums earned more than offset growth in policies written, while expenses rose, partly due to advertising and employee costs. Underwriting at Berkshire’s reinsurance, property/casualty and commercial insurance units also weakened, reflecting higher claims payouts, changes in the expected timing of future payouts, and currency fluctuations, among other factors.
  • While Berkshire said more people flew NetJets corporate jets – indicating that the 0.1% are doing just great – “soft consumer demand” weighed on sales at home furnishings businesses, indicating that the less than 0.1% are not doing just great. Berkshire Hathaway Energy saw profit rise 4%.
  • Meanwhile, as Bloomberg notes, Kraft Heinz was once again missing from Berkshire’s results. Kraft Heinz, which is set to report results on Aug. 8, appointed a new CEO and finally issued its delayed 10-K filing in June as it worked to clean up from a $15.4 billion writedown. The restatements in June caused a $34 million hit for Berkshire, it said Saturday.

It wasn’t all bad news: Berkshire said quarterly net income rose 17% to $14.07 billion, or $8,608 per Class A share, from $12.01 billion, or $7,301 per Class A share, a year earlier, however that increase was entirely due to the rise in the stock market i.e., the higher unrealized gains on Berkshire’s investments. The company reported a whopping $7.9 billion in investment gains, up 55% from a year earlier. In other words, more than half, or 55%, of Berkshire’s net earnings came from the ongoing levitation in the S&P, which came with an abrupt halt in the past week (as a reminder, a recent accounting rule forced Berkshire to report such gains with earnings. That rule adds volatility to Berkshire’s net results, and Buffett says it can mislead investors, although when the market is rising – as it did in Q2 – nobody complains).

Meanwhile, in lieu of pursuing full-blown acquisitions in companies with “sky high valuations”, Berkshire has had to make do with equity purchases in public companies: he has built a $50.5 billion stake in Apple and controversially committed $10 billion in April to help Occidental buy rival Anardako. However, even when it comes to what upside is left in stocks Buffett appears to be having second thoughts as he was a net seller of stocks in the quarter. Nowhere was the billionaire’s market skepticism more visible than in the company’s buybacks of its own stock: Berkshire repurchased only $400 million in shares, down sharply from $1.7 billion in the first three months of the year.

via ZeroHedge News https://ift.tt/2T0FQqS Tyler Durden

Walmart Is Trying to Patent Its Own “Libra”-Like Digital Currency

Authored by Marie Huillet via CoinTelegraph.com,

A new patent filing suggests that United States retail giant Walmart may be developing its own U.S. dollar-backed digital currency similar to Facebook’s Libra cryptocurrency. 

image courtesy of CoinTelgraph

Walmart filed patent for “Digital Currency via Blockchain”

Patent filing number 20190236564, “System and Method for Digital Currency via Blockchain,” was published by the U.S. Patent and Trademark Office (USPTO) on Aug. 1. The document outlines a method for:

“Generating one digital currency unit by tying the one digital currency unit to a regular currency; storing information of the one digital currency unit into a block of a blockchain; buying or paying the one digital currency unit.”

Walmart continues to outline that the proposed digital currency project can provide a zero-  or low-fee place for users to store wealth; one that can easily be redeemed and converted to store cash at selected retailers or partners. Such accounts could even be interest-bearing, the filing adds.

The digital currency could alternatively be developed so that it can be spent anywhere, the filing states, with prospective USD backing ensuring greater ease of deposits and withdrawals. It could, in another scenario, be tied to other digital currencies, rather than fiat ones.

Corporations becoming alternative banks

Early on in the filing, Walmart proposes that the launch of its digital currency could provide low-income households, for whom banking is costly, with “an alternative way to handle wealth at an institution that can supply the majority of their day-to-day financial and product needs.”

The “blockchain-protected digital currency” — as Walmart dubs it — could further challenge incumbent banks by removing the need for credit and debit cards: 

“The digital currency may act as a pre-approved biometric […] credit. A person is the ‘credit card’ to their own digital value bank.”

The retailer further imagines that the scope of its digital currency could extend to form part of wider, blockchain-powered service ecosystem, envisioning the creation of an “open-platform value exchange for purchases and for crowdsource work.” 

This would allow customers to buy products or services for themselves and for others — using the platform to hire a technician for repairs, an associate or a designated shopper for a given amount of time.  

While it currently faces a robust regulatory pushback, Facebook’s Libra stablecoin project has a similar ambition to provide low-cost, borderless value transfer and build out a digital currency-powered network.

For Walmart, its blockchain-related projects have to date focused on using the technology in areas such as supply chain managementcustomer marketplaces and smart appliances.

via ZeroHedge News https://ift.tt/31je9fV Tyler Durden

Everyone Has a Right to Call Politicians “Idiots” …

A N.C. gun store put up this billboard:

Rep. Rashida Tlaib responded:

No, calling politicians idiots isn’t “inciting violence” or “encouraging gun violence.” It is urging people to dislike the politicians—a basic right of every American. That’s so when people criticize President Trump or the Republican Congressional leadership or the left wing of the Democratic party or anyone else. It’s so regardless of what groups those politicians belong to.

It’s true that some tiny percentage of listeners may react to such criticism by deciding to violently attack its targets, whether the targets are on the Left or on the Right. But one basic premise of free speech isn’t that we don’t treat speech as “inciting violence” (a label for constitutionally unprotected speech, see Brandenburg v. Ohio (1969)), and suppress its communication to the 99.9999% of people who don’t act violently because of it, just because of a risk that 0.0001% would act violently.

And that’s so even for much harsher speech, such as calling people traitors or fascists or other such labels that some might see as morally justifying attacks. It is even more clearly true of simply calling them idiots. That’s true, I think, not just a matter of law but also of political ethics: There’s no basis for morally condemning such speech as supposedly “inciting violence.” (One might mildly condemn it as being nonsubstantive, but that condemnation would of course apply to a vast range of common criticism, and of common praise, of political figures from both sides.) It most certainly does not “NEED[] TO COME DOWN.”

Reps. Ilhan Omar, Rashida Tlaib, Alexandria Ocasio-Cortez, and Ayanna Pressley have set themselves up as leaders of the left wing of the Democratic Party. They have achieved national prominence, not just individually but as a group. In my view, their policies and views merit criticism; but even if you agree with them, surely others have a right to disagree. People have a right to criticize them as a group and not just individually. People have a right to continue to criticize them even when the politicians had gotten threats from third parties (as Omar, Tlaib, and Ocasio-Cortez, and Pressley reportedly have, and as I’m sure many other politicians have as well).

People have a right to criticize them disrespectfully and not just respectfully. They have a right to criticize them with slogans and not just substantively, again just as they do with President Trump or Republican Congressional leaders or anyone else. And of course they have a right to call them “idiots.”

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Everyone Has a Right to Call Politicians “Idiots” …

A N.C. gun store put up this billboard:

Rep. Rashida Tlaib responded:

No, calling politicians idiots isn’t “inciting violence” or “encouraging gun violence.” It is urging people to dislike the politicians—a basic right of every American. That’s so when people criticize President Trump or the Republican Congressional leadership or the left wing of the Democratic party or anyone else. It’s so regardless of what groups those politicians belong to.

It’s true that some tiny percentage of listeners may react to such criticism by deciding to violently attack its targets, whether the targets are on the Left or on the Right. But one basic premise of free speech isn’t that we don’t treat speech as “inciting violence” (a label for constitutionally unprotected speech, see Brandenburg v. Ohio (1969)), and suppress its communication to the 99.9999% of people who don’t act violently because of it, just because of a risk that 0.0001% would act violently.

And that’s so even for much harsher speech, such as calling people traitors or fascists or other such labels that some might see as morally justifying attacks. It is even more clearly true of simply calling them idiots. That’s true, I think, not just a matter of law but also of political ethics: There’s no basis for morally condemning such speech as supposedly “inciting violence.” (One might mildly condemn it as being nonsubstantive, but that condemnation would of course apply to a vast range of common criticism, and of common praise, of political figures from both sides.) It most certainly does not “NEED[] TO COME DOWN.”

Reps. Ilhan Omar, Rashida Tlaib, Alexandria Ocasio-Cortez, and Ayanna Pressley have set themselves up as leaders of the left wing of the Democratic Party. They have achieved national prominence, not just individually but as a group. In my view, their policies and views merit criticism; but even if you agree with them, surely others have a right to disagree. People have a right to criticize them as a group and not just individually. People have a right to continue to criticize them even when the politicians had gotten threats from third parties (as Omar, Tlaib, and Ocasio-Cortez, and Pressley reportedly have, and as I’m sure many other politicians have as well).

People have a right to criticize them disrespectfully and not just respectfully. They have a right to criticize them with slogans and not just substantively, again just as they do with President Trump or Republican Congressional leaders or anyone else. And of course they have a right to call them “idiots.”

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