Month: May 2016

Submitted by Nick Giambruno via InternationalMan.com,

You’ve likely heard that unknown hackers recently attacked Mossack Fonseca, a law firm in Panama that helps people set up offshore companies and bank accounts. They later leaked 11.5 million documents.

Almost immediately, central economic planners at the G20 and OECD—international organizations of the world’s largest economies—took advantage of the “Panama Papers” incident to shove GATCA down the world’s throat.

GATCA is a new “global standard” for the automatic exchange of financial information between governments. It’s modeled on an overreaching U.S. law, FATCA, which forces every financial institution on earth to give the IRS information.

Think of GATCA as FATCA on steroids. If countries widely adopt it, GATCA will deliver the final deathblow to financial privacy.

The G20 and OECD are even threatening to blacklist and sanction countries that don’t sign up for their privacy-killing scheme. Most have already caved. Notable holdouts include Panama, Lebanon and Bahrain.

Ramon Fonseca, a founder of the hacked Panama law firm, has said, “We believe there’s an international campaign against privacy. Privacy is a sacred human right (but) there are people in the world who do not understand that.”

I think Fonseca is absolutely correct.

When Privacy Dies

George Orwell once wrote, “If you want a picture of the future, imagine a boot stamping on a human face—forever.”

Not exactly a cheery thought, I know. But this dark future is, unfortunately, where we may be headed…and soon.

It’s a world where privacy is dead, where the government knows everything about you.

And we’re already almost there.

Today, the government knows what you watch on TV, what you read on the Internet, whom you call, and everything you do on your smart phone and computer. It has a record of every penny you’ve ever earned, saved, borrowed or spent. It knows where you’ve been, where you are and where you’re going.

All this government tracking is possible thanks to the mountain of laws and regulations that sprouted from the war on (some) drugs, the war on terror and so forth. Over the years, these schemes have incrementally destroyed privacy. Now, they’re going in for the kill.

There’s not much about your life the government doesn’t know already. The last vestiges of privacy may vanish very soon. Once that happens, governments will have almost unbreakable control over the individual.

This is exactly the opposite of how a free society works.

This meddling is not about protecting you from drug dealers or terrorists, it’s about the government seizing more power. This is why proponents of big government invariably support measures that kill privacy.

There’s also a psychological aspect to this relentless anti-privacy campaign. The government and its media allies have convinced the average person that “privacy” is a dirty word.

They’ve duped people into believing that only criminals and wrongdoers want privacy. “If you have nothing to hide, you have nothing to worry about,” as the popular, but wrongheaded, adage goes.

Many have forgotten that privacy is fundamental to preserving human dignity and protecting individuals from government overreach.

Financial Privacy and the New Feudalism

Financial privacy is by far the most demonized aspect of privacy. This is a huge clue. Governments wouldn’t hate financial privacy so much if it weren’t so important to individual liberty.

Politicians around the world see citizens as milk cows…they merely exist to be squeezed to the last drop. That’s why politicians are so eager to kill financial privacy. They’re building a giant tax farm and erecting electric fences to keep the cows and their milk from escaping.

Overzealous governments have been attacking financial privacy for decades. Now, they’re within striking distance of killing it once and for all.

I think they’ll use the suspicious Panama Papers incident as the pretext for their final push.

The death of privacy in general, and financial privacy in particular, will have far-reaching sociopolitical consequences. It will irrevocably skew the balance of power in favor of the government and against the individual.

 

I call it “the new feudalism.”

A world without privacy is a giant step backward for human freedom. It’s the new Dark Ages that George Orwell grimly predicted.

It’s Not Over Yet

While the forces pushing to centralize power have won battle after battle, their victory isn’t yet complete.

Technologies that empower the individual and push toward decentralization—including the Internet, encryption, 3D printing and cryptocurrencies—offer a powerful ray of hope. There are reasons to be optimistic about the future.

So, the tug of war continues…

Politicians around the world are working hard to make the new feudalism a reality. But it’s still possible to escape.

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While many investors and analysts are asking when the Federal Reserve will decide to hike rates again, Citi’s Global Head of FX Strategy Steven Englander asks a rather different question: Are investors beginning to price in QE4?

He points out that economic data in the U.S. hasn’t been very good (sans unemployment headline data), and that for every one positive data release, a series of disappointments follow. He points to the fact that Citi’s economic surprise indicator has been dropping since mid-April as reflecting that reality.

US economic data have been soggy, other than labor market data, which means that we get one positive data release a month followed by a series of disappointments. This is reflected in the Citi economic surprise index (Figure 1), which has been dropping since mid?April and where a 0 level would be considered strong outperformance.

The note goes on to say that if investors are starting to price out a June/July rate hike, and are beginning to think that a hike is not likely until May 2017, then that would mean implicitly there is a probability that the economy is bad enough where a rate cut would be warranted. Incidentally, this is precisely what we warned about last August in “Japan’s Dire Message To Yellen: “Don’t Raise Rates Soon.” It appears that Citi has finally gotten the message; we wonder how long until Yellen gets it too.

Considering the Fed downplays every time someone asks about negative rates, a return to the tried and true playbook and pulling out a “hail mary” quantitative easing program, or “QE4” would be the next logical step to get the economy going (in the minds of PhD’s sitting in the Eccles Building that is).

My conjecture is that investors have begun to price out June/July hiking risk they are beginning to reject the view that there is a high?probability fed funds path that is as shallow as the market is pricing in. If you really think that a full hike is not likely until May 2017 (as is now priced in), you have to think there is a non?negligible probability that the economy is so bad that you would want to cut. Fed officials turn purple whenever anyone suggests that they might be facing negative rates and indications are that it would be supremely unpopular with the public.

 

Before you get to negative rates you would have the hail Mary of QE4 which would act mainly to push down long term yields. In the past the prospect of QE supported equity markets, but there is so much skepticism at this point that the equity market reaction is negligible and the brunt of the concerns are falling on USD and long?term yields.

The underlined is actually critical because it goes to the point made earlier by another team at Citi which asked what happens if the Fed did QE4 and nobody bought stocks. That, right there, would be the moment the Fed effectively priced itself out of both credibility and market manipulation; it would also be the beginning of the end for the current iteration of financial markets.

In any event, Englander he’s still in the camp that believes there will be two rate hikes, he is a bit “puzzled” as to why others don’t see things setting up for further rate hikes. Englander admits that if the data is so soft that investors can only justify one hike a year, there is also a probability that the Fed would want to implement QE4 as a tool to push rates down as a method of stimulating the economy.  

I am still in the two hike camp (along with Lockhart it seems) but am trying to puzzle through what the market sees that is so different. Bottom line if investors see the data as so soft as to justify only one hike a year, they also see the probability distribution of outcomes as encompassing negative rates in theory and QE4 in practice. The implications of this perceived risk are playing out in FX and FI markets.

Recently the DXY broke its 100dma to the downside, reinforcing the above point.

And relative to Japan, who is actively pursuing NIRP, U.S. yields have quite a bit of room to fall further if a veiled NIRP is unleashed in the U.S. via a QE4 program, which as so many “leaders of thought” in the US have already opined is a much more preferable way of pushing if not earnings then at least P/E multiples higher.

With persistently soft economic data, and with Citi themselves warning that there could be even further weakness to come, it would come as no surprise to anyone (at least for those that read Zero Hedge) if the Federal Reserve reversed course and unveiled NIRP in QE4’s clothing, while simultaneously ridding banks of those risky energy loans the Dallas Fed claims nobody is worried about.

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Submitted by Ryan McMaken via The Mises Institute,

In his article on conscription today, Ron Paul writes:

Some proponents of a military draft justify it as “payback” for the freedom the government provides its citizens. Those who make this argument are embracing the collectivist premise that since our rights come from government, the government can take away those rights whether it suits their purposes. Thus supporters of the draft are turning their backs on the Declaration of Independence.

In his use of the Declaration of Independence, Paul is likely referring specifically to Jefferson's core argument found in the second paragraph:

[…Persons] are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it. [Emphasis added.]

These lines are so often blithely and casually quoted that they've become cliché. Nevertheless, a mindful reading of the text shows there is a specific logical argument here:

1. Humans have rights, including life and liberty. (The list provided by Jefferson is explicitly stated to not be an exhaustive list of rights.)

 

2. The rights do not come from governments, but from some other source that precedes governments and are separate from them.

 

3. Governments exist for a specific purpose: to secure rights.

 

4. The governments are instituted by the governed, and the legitimacy of the government depends on the consent of the governed.

 

5. If the government fails to secure rights, the governed are entitled to abolish or alter the government.

Although the text of the Declaration likely strikes many Americans as rather prosaic, it represents a historically radical strain of thought within the liberal tradition that significantly limits the prerogatives of states. 

Civil Government Has a Very Specific Purpose 

Predating Jefferson by centuries, the liberal ideas behind the Declaration go back even to medieval Thomist thought which regarded civil government as an institution designed to accomplish very specific ends. Thus, the state was limited in its authority to those specific activities necessary to achieve the ends. 

Later, British liberals like John Locke limited civil governments to the realm of protecting "life, liberty, and property." 

In practice, therefore, institutions for policing and security (i.e., military and law enforcement institutions) exist for a single purpose: to secure property rights. If these institutions fail at their jobs, or if the governed withdraw their consent for any reason, military and law enforcement institutions cease to be legitimate. 

Property Precedes States and their Military Power 

This bourgeois liberal emphasis on property hints at other implications for the liberal view of the state: the state only has value insofar as it protects the property that is the state's raison d'etre. Without property, states and their agents — namely, military personnel — have no legitimate value or function. 

In this way then, the liberals understood that the taxpayers, property owners, and citizens of a society are not in debt to the military, which is simply the enforcement arm of the state. Things are in fact the other way around. It is the private property owners who provide the military with a reason to exist, and who also provide it with its funding, its materiel, and — preferably — it's marching orders. Rightly understood, the military is nothing more than the "hired help" for the taxpayers/property owners. 

This is why it is so odd and disordered, as Paul noted in his comments on conscription, to claim that the taxpayers and citizens owe some kind of "payback" to the state or its military arm. In reality, it is the state and its military that should be thanking the private sector for deigning to provide the military and the state with legitimacy and funding. 

And yet, persistent social conventions today encourage the taxpayers to thank the government employees for their "service" in spite of the fact that the taxpayers pay handsomely, and in recent years, the taxpayers have been shelling out over $700 billion dollars in per year in military spending. (That's $5,600 per household per year, not including any state or local law enforcement.) The rest of the federal government, of course, costs even more than that. 

Source: Office of Management and Budget, Table 4.1

Moreover, without the high worker productivity and long hours worked by average Americans, the US government would not have the state-of-the-art equipment and relatively safe conditions it now enjoys. 

The Military Should Be Thanking the Taxpayers

Instead of citizens thanking the military for allowing the taxpayers of the privilege of giving the military arm of the state hundreds of billions of dollars each year, the military should be thanking the taxpayers instead. The taxpayers should be regularly approached on the street by soldiers and other government agents saying things like: 

• "Thank you for paying me a salary that is higher than what I could earn with my skills and education level in the private sector." 
• "Thank you for providing us with state-of-the-art weapons, vehicles, and other equipment that keep casualties among American soldiers extremely low when compared with other militaries." 
• "Thank you for subsidizing my higher education, my mortgage, and for providing funding other programs designed to assist veterans."
• "Thank you for for getting up and going to work every day to so we call can enjoy a high standard of living, safe streets, and so much more that depends on a productive and hard working private-sector population."

But don't expect to hear much of this any time soon. Instead, we'll be told how the taxpayers owe it to the government to give even more in terms of labor and freedom via conscription, should the government decide conscription is necessary. 

If you're a young person in America today, you can already look forward to decades of paying thousands every year to support an enormous military, and you'll have virtually no say whatsoever over how those dollars are spent, where they are spent, or even whether or not they'll be used to further tax and regulate your daily life. 

But, that's not enough. "Freedom isn't free," you'll be told, but this isn't in reference to the enormous tax bill you're paying every year. No, this slogan is actually a veiled threat against you and a claim that however much you're paying now in terms of dollars or personal freedom, you should be ready and willing to give even more. 

(NB: In this article, I've assumed that what much of the US military does (i.e., the 2003 invasion of Iraq, which cost the taxpayers $1 trillion) actually has something to do with protecting the property of American citizens. That's an extremely generous assumption, and one rather divorced from reality. But, we'll have to address that at another time.)

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Russia has wasted no time in responding to NATO's decision to deploy 4,000 troops to Russia's border. Defense Minister Sergey Shoigu announced that Russia will be deploying two new divisions to the West, and one to the South (reportedly with 10,000 troops each) in order to counterbalance NATO's increased military presence.

"The Defense Ministry is taking a number of measures to respond to the NATO military buildup at the Russian border. Before the year's end two new divisions will be formed in the Western Military District and one in the Southern Military District." Shoigu said.

Aleksandr Grushko, Russia's envoy to NATO said in response to NATO's plan "we are not passive observers, we consistently take all the military measures we consider necessary in order to counterbalance this reinforced presence that is not justified by anything. Certainly we'll respond totally asymmetrically."

Regarding NATO's confrontational approach, Grushko said "cooperation will be possible only when NATO countries start realizing that the policy of confrontation contradicts their own national interests."

Grushko also warned the U.S. about flying reconnaissance missions over Russia, something they followed through on twice over the past month, as the U.S. continues to push the limits.

"It seems to me that these [reports on potential resumption of flights by US reconnaissance planes] are nothing more than another propaganda volley, but made with an intent. Reconnaissance aircraft will not fly over Russia."

And finally, Russian Foreign Minister Sergey Lavrov sums up what Russia is thinking, which is that NATO is approaching Russia, not the other way around.

"NATO military infrastructure is inching closer and closer to Russia’s borders. But when Russia takes action to ensure its security, we are told that Russia is engaging in dangerous maneuvers near NATO borders. In fact, NATO borders are getting closer to Russia, not the opposite."

Here is a map of Russia's regional military commands. Two divisions will be sent to the Western District, and one to the Southern District.

Incidentally, as joint U.S. military drills began today in Moldova, which is virtually bordering Russia, lawmakers from the Party of Socialists of the Republic of Moldova and other protestors rallied to try and block U.S. military vehicles from crossing the border into Moldova..

Igor Dodon, the leader of the Party of Socialists of the Republic of Moldova called the drills a military occupation.

"Carrying out a march of NATO vehicles in Moldova can only be described as the military occupation of the country. It is a rough slap to the Constitution of the Republic and to the Parliament that adopted the declaration on permanent sovereignty and neutrality of Moldova"

* * *

With tensions already rising between the U.S. and Russia already, one incident in this newest development in the clash of militaries could very well lead to war. Furthermore, in the event of the U.S. electing a President Trump, with his shoot first, ask questions later attitude; or a President Clinton, with her neocon hawk backers pushing and prodding the world to the brink, may take the world there anyway.

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Submitted by Simon Black via SovereignMan.com,

There’s something about being insanely rich that people will believe every word that comes out of your mouth no matter how bizarre.

And no, I’m not talking about Donald Trump. Warren Buffett is an even better example.

As one of the richest men in the world, Buffett’s opinions carry almost Biblical impact, even when they might be completely ridiculous.

Just a few days ago, for instance, he quipped that drinking Coca Cola is better for him than eating broccoli.

He’s also famously expressed contempt for owning gold, suggesting instead that people should simply own a US stock market index fund (like the S&P 500) and hold it for 50 years.

Curiously, though, gold has vastly outperformed both the S&P 500 and Dow Jones Industrial Average over the past half-century.

While the S&P 500 index is up 24.3x in that period and the Dow Jones Industrial Average is up 18.2x, gold has appreciated 36.6x.

Even when taking into account the effects of dividends, fund expenses, cash drag, taxes, etc. the evidence still doesn’t support Buffett’s assertion. Yet people believe him.

But perhaps one of Buffett’s most popular opinions is that America is simply awesome and will only get better.

He’s spoken and written extensively in his annual reports that America is the #1 place to be in the world, that the massive opportunity in the Land of the Free will only get better, and that the United States has “never been greater”.

Buffett is right that the United States is an amazing place.

It was founded as a land of opportunity where hard work, risk taking, and a little bit of luck resulted in incredible prosperity.

And some of those elements do still exist.

But Warren Buffett’s outlook on the United States is underpinned by an assumption that the next 50 years will look like the previous 50 years.

That’s clearly not the case.

When Warren Buffett’s company Berkshire Hathaway was rapidly expanding in the 1960s and 1970s, the US government’s debt level was low and the dollar was strong.

Since then there have been MILLIONS of pages of regulations created in the Land of the Free, trillions of dollars worth of debt accumulated, and countless dollars conjured out of thin air.

Buffett is well known for having a very long-term view on things. For him, the typical holding period for owning stocks is ‘forever’.

And that’s a great outlook to have when the fundamentals are in your favor, i.e. if you own shares of a great company with honest, competent management.

But you can’t hold the view that in the long-run everything will always be better.

15 years ago Yahoo, Motorola, and Nokia were three of the top technology companies in the world.

Apple was still years away from launching the iPhone. Few people had heard of Google. And Mark Zuckerberg was still in high school.

But these circumstances changed. Quickly.

Nations and economies also change. History is very clear on this point: wealth and power shift.

Just because a country might be at the top today doesn’t mean it will be that way forever, especially when the nation’s fundamentals and economic headwinds grow worse each year.

So with due respect to Warren Buffet’s investment acumen, there are decades of economic trends, millions of pages of regulations, and thousands of years of human history proving that his outlook on America is wrong.

This matters. It’s important to look at the world with full view of objective data.

And being objective doesn’t mean that you’re pessimistic or negative.

It means that you can make plans and draw rational conclusions based on facts, not based on propaganda or the way we wish things could be.

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Authored by 720Global.com's Michael Lebowitz, via RealInvestmentAdvice.com,

While there is no doubt that patience is a virtue for investors, exercising prudence is equally important. In our prior article “Limiting Losses”, we examined how taking prudent measures, at certain times, can enhance your ability to create wealth over the long-term for your clients.  Despite basic math and historical evidence proving its usefulness, investors typically ignore prudence, especially when it is required most. The siren’s song of a rallying market inevitably proves too compelling for many investors.

On the heels of the first quarter’s GDP release we share our concern that the probability of a recession continues rising while stock prices remain at historically high valuations. Now may be a good time to heed history’s warnings. The focus of this article rests on one simple fact- recessions are not good for stock prices.

 

GDP

In the most recent GDP release the Bureau of Economic Analysis (BEA) reported 0.50% annualized economic growth, a sharp departure from the 1.40% annualized growth of the prior quarter.  Economic growth is now running below a 1.00% annualized rate for the last two quarters and has been trending lower for the last two years as graphed below.

Economists consider this quarter an anomaly as judged by their forecasts for a rebound in the second quarter. The current consensus projection for the second quarter ending June 30, 2016, is 2.50%.  Despite a secular trend of slowing domestic economic growth and global economic weakness, few economists are predicting a recession this year. Then again, few have ever correctly forecast a recession.

The graph below highlights the slowing secular trend in GDP growth and the series of cycles through which the U.S. economy tends to move. Note that five of the last seven economic cycles have progressively peaked at lower levels. If the current cycle peaked in mid-2015 (labeled “peak?”), a multi-year decline in GDP growth is likely. The average decline in economic growth from peak to trough for the seven cycles has been -4.3%, with -3.0% being the smallest decline.  A 3.0% decrease from the current level of 2.3%, implies that the U.S. economy will have a three-year period averaging -0.7% growth.

If economists are correct and economic growth in the second quarter remains true to forecasts, the economy will avoid a recession in the first half of the year. That said, we must consider that while economists foresee a pickup in economic activity, relying on their forecasts is dangerous. On February 14, 2016, the Atlanta Federal Reserve was forecasting first quarter economic growth of 2.7%, and a consensus of economists expected 2.1% growth. Based on the recent GDP data, those forecasts were grossly off the mark, leaving one to question the integrity of second quarter forecasts.

Regardless of whether or not the first half of 2016 will be labeled a recession, one prudently should consider that the current period of economic growth, following the great financial crisis, is long in the tooth.  The current economic expansion is now the second longest period of sustained economic growth in over 65 years. Suggesting that the economy is due for a recession is not an overstatement.

 

Valuations

Equity valuations are higher than average by many measures. In “A Bug in Search of a Windshield” we gave one example- “The current P/E is 55% above the historical mean and surpasses 92% of all P/E data. Only multiples from the 2000 and 2008 bubble periods were higher than today”. Doug Short created a simple model that averages four common equity valuation techniques. Based on his analysis, the market is 76% overvalued as compared to the average dating back to 1900. According to his analysis (link), current valuations are only surpassed by the exuberant markets leading into the depression of the 1930’s and the tech crash of the early 2000’s. Suggesting that equities are at lofty valuations and prices is not an overstatement.

 

GDP and Valuations

The possibility of a recession while equity valuations are extreme is deeply troubling.  Since 1929, there have been 14 recessions. All but one, in 1945, coincided with a period of negative returns for stocks. Included in this data, as shown in the table below, are periods when stock valuations ranged from greatly undervalued to extremely overvalued. Data and Table Courtesy Doug Short

Most concerning to us are the top four rows. During these three historic periods and the current one, (“We are here”) valuations were/are extreme as shown in the middle column. The average stock market decline of the three historical periods was 62%. Based solely on historical data and current valuations versus the mean, a 50%+ drawdown would follow historical precedence.  Suggesting that a severe drawdown could occur is not hyperbole or an overstatement.

 

Summary

This article provides more supporting evidence that the odds are stacked against equity investors. That does not mean the market cannot go higher and exhibit even greater speculative fervor. However, as fiduciaries, we must consider the long-term benefit of limiting drawdowns, especially when there is historical reason to believe they could be extreme. While it is not easy going against popular wisdom, we recommend exercising prudence and taking some chips off the table.

We end with an interesting fact. The current stock market is in the midst of the second longest bull market since the great depression, only surpassed in duration by the 4,495-day bullish run of the 1990’s.

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