Authored by John Kass, originally posted at The Chicago Tribune,

Has America become so numb by the decades of lies and cynicism oozing from Clinton Inc. that it could elect Hillary Clinton as president, even after Friday's FBI announcement that it had reopened an investigation of her emails while secretary of state?

We'll find out soon enough.

It's obvious the American political system is breaking down. It's been crumbling for some time now, and the establishment elite know it and they're properly frightened. Donald Trump, the vulgarian at their gates, is a symptom, not a cause. Hillary Clinton and husband Bill are both cause and effect.

FBI director James Comey's announcement about the renewed Clinton email investigation is the bombshell in the presidential campaign. That he announced this so close to Election Day should tell every thinking person that what the FBI is looking at is extremely serious.

This can't be about pervert Anthony Weiner and his reported desire for a teenage girl. But it can be about the laptop of Weiner's wife, Clinton aide Huma Abedin, and emails between her and Hillary. It comes after the FBI investigation in which Comey concluded Clinton had lied and been "reckless" with national secrets, but said he could not recommend prosecution.

So what should the Democrats do now?

If ruling Democrats hold themselves to the high moral standards they impose on the people they govern, they would follow a simple process:

They would demand that Mrs. Clinton step down, immediately, and let her vice presidential nominee, Sen. Tim Kaine of Virginia, stand in her place.

Democrats should say, honestly, that with a new criminal investigation going on into events around her home-brew email server from the time she was secretary of state, having Clinton anywhere near the White House is just not a good idea.

Since Oct. 7, WikiLeaks has released 35,000 emails hacked from Clinton campaign boss John Podesta. Now WikiLeaks, no longer a neutral player but an active anti-Clinton agency, plans to release another 15,000 emails.

What if she is elected? Think of a nation suffering a bad economy and continuing chaos in the Middle East, and now also facing a criminal investigation of a president. Add to that congressional investigations and a public vision of Clinton as a Nixonian figure wandering the halls, wringing her hands.

The best thing would be for Democrats to ask her to step down now. It would be the most responsible thing to do, if the nation were more important to them than power. And the American news media — fairly or not firmly identified in the public mind as Mrs. Clinton's political action committee — should begin demanding it.

But what will Hillary do?

She'll stick and ride this out and turn her anger toward Comey. For Hillary and Bill Clinton, it has always been about power, about the Clinton Restoration and protecting fortunes already made by selling nothing but political influence.

She'll remind the nation that she's a woman and that Donald Trump said terrible things about women. If there is another notorious Trump video to be leaked, the Clintons should probably leak it now. Then her allies in media can talk about misogyny and sexual politics and the headlines can be all about Trump as the boor he is and Hillary as champion of female victims, which she has never been.

Remember that Bill Clinton leveraged the "Year of the Woman." Then he preyed on women in the White House and Hillary protected him. But the political left — most particularly the women of the left — defended him because he promised to protect abortion rights and their other agendas.

If you take a step back from tribal politics, you'll see that Mrs. Clinton has clearly disqualified herself from ever coming near classified information again. If she were a young person straight out of grad school hoping to land a government job, Hillary Clinton would be laughed out of Washington with her record. She'd never be hired.

As secretary of state she kept classified documents on the home-brew server in her basement, which is against the law. She lied about it to the American people. She couldn't remember details dozens of times when questioned by the FBI. Her aides destroyed evidence by BleachBit and hammers. Her husband, Bill, met secretly on an airport tarmac with Attorney General Loretta Lynch for about a half-hour, and all they said they talked about was golf and the grandkids.

And there was no prosecution of Hillary.

That isn't merely wrong and unethical. It is poisonous.

And during this presidential campaign, Americans were confronted with a two-tiered system of federal justice: one for standards for the Clintons and one for the peasants.

I've always figured that, as secretary of state, Clinton kept her home-brew email server — from which foreign intelligence agencies could hack top secret information — so she could shield the influence peddling that helped make the Clintons several fortunes.

The Clintons weren't skilled merchants. They weren't traders or manufacturers. The Clintons never produced anything tangible. They had no science, patents or devices to make them millions upon millions of dollars.

All they had to sell, really, was influence. And they used our federal government to leverage it.

If a presidential election is as much about the people as it is about the candidates, then we'll learn plenty about ourselves in the coming days, won't we?

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While most attention over the next week will be focused on the fascinating slow-motion-train-wreck developments in the US political arena over the next week, let’s please think of the central banks, which are used to being the key source of public fascination. And while the Fed’s November 1-2 meeting will come and go, with Yellen paralyzed with fear and certain to change nothing just 6 days before the election, a far more interesting central bank meeting due later this week, is that of the BOJ which addresses the market on November 1, and which over the past few months has set the global bond market on edge with its attempts to steepen the JGB yield curve which in turn led to the VaR-shocked early September stock selloff, inspiring other central banks to contemplate tapering long-end purchases resulting in a the biggest global debt selloff since the Fed’s 2013 taper tantrum.

This is what to expect from the BOJ according to Goldman Sachs:

We expect the Bank of Japan (BOJ) to maintain current monetary policy at its October 31-November 1 Monetary Policy Meeting. Here, we look at this and other points in a Q&A format.

Q1: Will the BOJ ease further at the next monetary policy meeting?

A1: We expect the BOJ to maintain the status quo.

We expect the BOJ to opt to maintain current monetary policy, keeping the short-term policy rate at -0.1% and the long-term (10-year) yield target at around 0%. Our impression from the BOJ’s “comprehensive assessment” in September and the adoption of an “inflation-overshooting commitment” is that the BOJ’s bias toward maintaining the status quo has strengthened, as we discuss in more detail in Q4.

On top of it, we see very little chance of the BOJ embarking on additional easing at the next monetary policy meeting (MPM), given the following four factors. (1) We expect core CPI inflation, which is tied to the inflation-overshooting commitment, to rise in coming months due to slowing in the pace of year-on-year energy price declines. (2) The Japanese government has formulated a second FY2016 supplementary budget, which is likely to buoy the economy through FY2017. (3) Although the BOJ has set a 10-year JGB yield target of around 0%, little improvement is evident in the JGB yield in the 1-5-year zone, which is an important factor for banks earnings. (4) Market expectations for a near-term rate hike have risen in the US and with this the yen has come off high levels in the forex market.

Q2: What changes do you expect in the Outlook Report?

A2: We expect the BOJ to lower its FY2017 inflation outlook and push back the target date for achieving its 2% inflation target. However, we see the importance of the Outlook Report diminishing in terms of forecasting monetary policy.

We expect the BOJ to lower its inflation outlook to around 0% for FY2016 (from +0.1% as of July outlook report), around +1.3% for FY2017 (from +1.7%), and around +1.7% for FY2018 (from +1.9%; see Exhibits 1-2). We also see a possibility of a slight downward revision to the BOJ’s real GDP forecast, to around +0.9% for FY2016 (from +1.0%) given data thus far, but we expect almost no changes in other areas. We think the BOJ will push back the deadline for its 2% inflation target, which has been within FY2017 (i.e., before the end of March 2018), by around six months at least.

In its comprehensive monetary policy assessment, we believe the BOJ has already drawn lines of defense, saying “a further rise in inflation expectations through the adaptive mechanism is uncertain and may take time” (bolding added by us). Moreover, it has already extended its timeframe from a short battle to a prolonged one by introducing an inflation-overshooting commitment. We believe that the connection between the inflation outlook in the Outlook Report and monetary policy actions will diminish going forward (see Q4).

Exhibit 1: The BOJ’s economic and inflation outlook

Source: BOJ, JCER
 

Exhibit 2: Revisions to the BOJ’s inflation outlook

Source: BOJ, JCER
 
Q3: What do you think about the JGB market conditions under the yield curve control?

A3: JGB market functionality has already deteriorated and we expect it to continue to deteriorate under the yield curve control, as long as the BOJ continues with the current monetary policy.

Bond market functionality has been deteriorating even prior to the introduction of yield curve control in late September. In the BOJ’s bond market survey, the DI for bond market functionality deteriorated to -46 in August 2016, as compared to -25 in February 2015, when the survey first started (see Exhibit 3)[1]. Deterioration in the DI was particularly noticeable after the adoption of the negative rate policy.

With the addition of 10-year JGB yield control on top of the negative interest rate policy, we expect long-term rates to become more “fixed” and market functionality to decline even further. Already, on October 19, an entire day went by with no transactions made in newly issued 10-year JGBs (according to the Japan Bond Trading Co.). This is the first time in 13 months, since September 24, 2015, that no transactions have been made for an entire day.

We believe that the BOJ is also concerned about impairment of JGB market functionality, in that it may potentially cause large stress in the market when the BOJ decides to raise its policy rates in the future. We see little way to get around this issue, however, as long as the BOJ maintains current monetary policy.

Exhibit 3: DI on Bond market functionality

Source: BOJ
 

Q4: What is the outlook for BOJ’s monetary policy beyond the next MPM?

A4: We expect the BOJ to maintain status quo for now, barring a surge in the yen’s value, although there is uncertainty about the effectiveness of further rate cuts in correcting yen appreciation.

At its September monetary policy meeting, the BOJ announced a comprehensive assessment and also decided to adopt a new monetary easing framework that it refers to as “Quantitative and Qualitative Monetary Easing with Yield Curve Control.” In light of this, we see a high likelihood that the BOJ will continue to preserve further monetary easing as a future option barring any major market shocks, such as a surge in the yen’s value.

Our view is based on two main factors: (1) The BOJ’s latest set of policies represents a major shift in direction to prepare for a prolonged battle, in which it will only respond to significantly negative exogenous shocks, and the bias toward maintaining the status quo appears to have grown stronger. (2) It will take more time for the BOJ’s new framework to take hold among the BOJ and bond market participants.

The BOJ’s additional monetary easing options center on taking short rates further into negative territory insofar as the BOJ regards this as an effective means of correcting yen appreciation. In its comprehensive assessment, the BOJ said that the flip-side of the positive effects of the negative interest rate policy is growing pressure on financial institutions’ profits. It went on to say that the impact can vary depending on the duration of the policy. With the BOJ explicitly extending its timeframe and saying that the side-effects of the negative interest rate policy will depend on how long the policy is maintained, we think that the number of monetary easing policy measures that the BOJ is left with has diminished. This will serve to strengthen the bias toward maintaining the status quo, in our view.

In addition, our analysis indicates that if the BOJ were to take interest rates deeper into negative territory, it would likely need to lower the 10-year yield target by at least the same degree as the rate cut (see Japan Economics Analyst: To what degree can the BOJ control the 10-year JGB yield? October 17, 2016). Our understanding is that the BOJ’s aim is to avoid lowering 10-year yields, as much as possible, in order to minimize the adverse impact on financial institutions’ earnings. However, it may not be possible to simultaneously achieve both this objective and that of strengthening the negative interest rate policy. This risk, too, could strengthen the bias towards maintaining status quo.

In a speech on August 27, BOJ Governor Haruhiko Kuroda said that the adoption of a negative interest rate policy provides central banks with more leeway in coping with a variety of adverse shocks[2]. In line with this remark, we expect the BOJ to position further rate cuts as a backstop measure for dealing with negative exogenous shocks, such as a surge in the yen’s value. However, with the number of measures the BOJ is left with in this prolonged battle having diminished, it would not likely be able to make a move if the yen were merely to breach the ¥100/US$ level. We should note, however, uncertainty about the effectiveness of further rate cuts in correcting yen appreciation on such occasions.

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While various prominent politicians in the US, who shall remain nameless, are seeminly made out of Teflon when it comes to policy-peddling scandals, South Korea is less lucky and, as the WSJ reports, South Korea’s president Park Geun-hye has accepted the resignation of her chief of staff and four other senior aides, following public outcry over the influence of a friend of Geun-hye’s in state affairs. The move comes after the president’s public approval ratings plunged to historic lows and thousands of street protesters called for her resignation Saturday after she said recently that her friend, Choi Soon-sil, had helped her prepare speeches early in her presidential term.

The two women have been friends for more than 40 years and became connected through Ms. Choi’s father, who created a religious cult and was close to Ms. Park’s father, former South Korean president Park Chung-hee. The cult connection in Ms. Choi’s family has increased public suspicions of her motives.

So wait, someone else writing the president’s speeches, and people riot over that?  Americans, used to a far greater degree of drama in recent months would merely gloss over, as they would over the allegation by a South Korean broadcaster that Ms. Choi was also given access to confidential government documents, based on files it retrieved from a tablet computer that it says it recovered from an office she used. In a South Korean newspaper interview, Ms. Choi, who has no position in government, denied accessing material other than the speeches.

No really, please stop us when this “scandal” which threatens to overthrow the South Korean administration reminds readers of something that has kept America up for the past few months.

South Korean police detain a protester during a rally against South
Korean President Park Geun-hye in Seoul on Saturday, Oct. 29, 2016

Oh, and South Korea’s scandal also involves, drumroll, “charitable foundations.”

According to the WSJ, Choi, 60, who is also the subject of an investigation by prosecutors into possible corruption at two charitable foundations, returned to South Korea from London on Sunday morning. Her lawyer told reporters she would “actively respond” to prosecutors questions.

The crisis is the biggest Ms. Park has faced since high-profile resignations in government and an overhaul of state agencies following the sinking of a South Korean ferry in 2014 that she said was partly due to failures of government oversight.

In what may be a preview of things to come to the US, opposition politicians have called for a thorough investigation into the scandal, but haven’t called for Ms. Park’s impeachment.

Analysts say it is unlikely Ms. Park will resign unless the crisis escalates. But the furor will likely accelerate the start of her so-called ‘lame duck’ period, when her own political powers are diminished ahead of a presidential election at the end of next year. South Korean presidents serve a five-year term and are barred from running for re-election

Sadly for Park, if America is any example of how deep the rot goes, the crisis will certainly escalate. 

Furthermore, in a peculiar twist, the presidential crisis may impact US diplomatic strategy in the region. According to the Eurasia Group, the crisis will make it harder for Ms. Park to push through economic initiatives, such as labor-market reforms, and could potentially impact existing policy plans like the deployment of an advanced U.S. missile-defense shield next year.

While Park remains in power, her staffers are getting the axe. The resignations of Ms. Park’s senior staff come after she requested they offer to quit, a process that is common in South Korea to show the government is taking responsibility for criticism directed at it. A presidential spokesman said the moves were made “in light of the current situation,” and declined to provide further explanation. Park hasn’t spoken about the case publicly since making a nationally televised apology Tuesday for sharing her speeches with Choi.

* * *

And then, the final similarity to that oddly “similar scandal” taking place in the US: On Sunday, prosecutors looking into Ms. Choi confiscated computers and documents from officials at the presidential office.

Yet one place where the US and South Korean differ, is in the media’s response. South Korean newspapers have been full of further accusations about the influence of Ms. Choi over Ms. Park in recent days, fanning public anger.

Another difference: the public’s response. While in the US there is much indignation over said “similar scandal” most of it is confined to Twitter and various online venues; meanwhile in South Korea several thousand protesters occupied the main square in downtown Seoul on Saturday evening to call for Ms. Park to resign. Some wore masks of Ms. Choi and mimicked the actions of a puppeteer, with strings connected to other demonstrators wearing masks of Ms. Park.

* * *

The WSJ concludes that scandals over alleged corruption or other wrongdoing are common among South Korean presidents, often late in their terms. Ms. Park’s public approval rating has sunk to about 14% in one poll, similar to the levels of other recent presidents, all of whom completed their terms. On the other hand, Ms. Park’s public approva rating would be around 80% after sampling a group of 5 “random” respondents, all of whom received kickbacks and benefits from her corruption. Furthermore in the US, a few donations to Park’s charitable foundations, a few kickbacks, and all would be forgiven.

It almost makes us wonder which is the greater banana republic: South Korea or the US…

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By EconMatters

The Republican Party won the battle and lost the war in the nomination phase of this election process, they nominated an unelectable candidate. Sun Tzu “Every battle is won before it’s ever fought.”

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Confirming the swirling rumors from Friday, WTI crude is leaking lower (near $47 handle) in early asia trading afer Bloomberg reports OPEC's internal disagreements over how to implement oil-supply cuts agreed to last month prevented a deal to secure the cooperation of other major suppliers.

More than 18 hours of talks over two days in Vienna yielded little more than a promise that the world’s largest oil producers would keep on talking. Discussions will continue in late November, just days before the Organization of Petroleum Exporting Countries is supposed to finalize the accord that lifted oil prices to one-year highs.

 

Non-OPEC nations ended talks with the group on Saturday without making any supply commitments, Brazil’s Oil and Gas Secretary Marcio Felix said after the meeting. Brazil won’t restrict its oil production, though it’s willing as early as next year to host future OPEC conferences with the world’s biggest producers, he said in a phone interview.

 

A deal wasn’t possible because internal OPEC talks on Friday reached an impasse over the role of Iran and Iraq, both of which want to be exempt from any cuts. While non-member Oman said Saturday it was willing to cooperate in a supply deal, it couldn’t commit to a specific output cut until OPEC had its own agreement.

 

read more here…

And WTI is extending Friday's losses…

 

As OilPrice.com's Julianne Geiger noted, in a tweet late in the afternoon on Friday, the Wall Street Journal’s financial reporter, Georgi Kantchev, said that OPEC’s technical meeting in Vienna was in deadlock, with Iraq and Iran disputing data on the grounds that OPEC has underestimated their production.

A separate tweet moments later stated that Iraq and Iran “refuse” to freeze their output, according to WSJ sources.

The news that Iraq and Iran may be refusing to freeze may disappoint the markets, but it is not shocking, and follows a pattern we’ve seen unfolding for quite some time.

Most recently, Iraq insisted on Sunday that it should be exempt from any OPEC cuts that were being discussed on the grounds that it needed to maintain production while it continued its fight against Islamic State. At the time, Iraq had scared the markets, not by refusing to take part in OPEC cuts that are said to be finalized on November 30, but by mentioning that it should be producing some 9 million barrels per day were it not for the war, pointing out that other countries had taken a chunk of its previously held market share.

But before that, Iraq and Iran had decided not to send their oil ministers to the OPEC meeting in Istanbul the week of October 10, in a sign that not all OPEC members were on board weeks ago.

But Iraq showed its displeasure at the deal all the way back in late September, when it began to question the method in which OPEC calculated production figures—production figures that would be used to determine who would cut what.

Meanwhile, OPEC long ago implied that Iran would receive some type of pass, with Saudi Energy Minister Khalid al-Falih saying back in late September that Iran, Nigeria, and Libya would be allowed to produce “at maximum levels that make sense”—whatever that means.

So if what the WSJ sources are saying is true, and Iraq and Iran are indeed flat-out refusing to freeze their output, this changes nothing other than to offer up some level of certainty to the market. The OPEC deal was on shaky ground from the beginning, and today, it remains on more solid ground that the deal will likely be a no-go.

Although some had hoped that Iraq would join in, the likelihood that they would give up even more market share than what it already lost was always quite slim.

This leaves Saudi Arabia, OPEC’s #1 producer, and the United Arab Emirates, OPEC’s #4 producer, holding most of the bag. If OPEC is still committed to cut between 200,000 and 700,000 bpd—and if OPEC grants Iraq—OPEC’s #2—and Iraq—OPEC’s #3—a pass, then Saudi Arabia and UAE should get ready to hunker down and take the brunt of the cuts, or resign themselves to the fact that a cut just isn’t feasible, with two of OPEC’s top four producers are not ready to take part.

*  *  *

So what happens next?

Chart: Bloomberg

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

This week I want to discuss several risks I am currently watching starting to manifest “behind the scenes” so to speak. But first, let’s take a quick review of the markets which currently are flashing some very troubling signs.

Last week, I discussed the ongoing consolidation and struggle as the markets remain “trapped” between downtrend resistance and the crucial support levels of the previous breakout to new highs. The charts below have been updated through Friday afternoon.

“If we zoom in we can get a little clearer picture about the breakdown.”

The two dashed red lines show the tightening consolidation pattern more clearly.

Importantly, while the market has remained in suspended animation over the past three months, the deterioration of the market is quite evident. However, despite the ongoing political circus, weak corporate earnings (considering the massive reductions in expectations since the beginning of the year), Apple (AAPL) and Amazon (AMZN) both missing expectations (which really goes to the heart of the consumer,) and consumer sentiment waning, it is surprising the markets are still holding up as well as they are. As long as the markets can maintain support about 2125, the bull market is still in play, but at this point, not by much.

More importantly though, despite the ongoing defense of support at current levels, the deterioration in momentum and price action has now triggered intermediate and longer-term “sell signals” as shown below. 

Importantly, notice that both of the previous bullish trend lines (depending on how you measure them) have now been violated. Previously, when both “sell signals” have been triggered, particularly with the market overbought as it is now, the subsequent decline has been rather sharp. 

Lastly, as stated above, the 50-dma moving average has begun to trend lower, the downtrend resistance from the previous market highs remains present and the “sell signal” occurring at high levels suggests the risk of a further correction has not currently been eliminated.

As stated last week, and remains this week:

“It is important, as an investor, is not to ‘panic’ and make emotionally driven decisions in the short-term. All that has happened currently is a ‘warning’ you should start paying attention to your investments.” 

Just be cautious for the moment.

---

Economy About To Hit The Dollar “Wall”

Since early May, I have continued to maintain an outlook for a stronger dollar as higher U.S. interest rates continue to attract foreign inflows.

As I wrote several weeks ago:

“As shown below, a stronger dollar will provide another headwind to already weak earnings and oil prices in the months ahead which could put a damper on the expected year-end ‘hockey stick’ recovery currently expected.”

Of course, the real problem of a stronger dollar at this juncture is that it weighs on exports which comprise about 40% of corporate earnings. As I stated last week:

“The dollar rally could be a real problem with respect to the earnings recovery story going into the end of the year. With an already weak economy, a stronger dollar means weaker exports for companies and a drag on corporate profitability.”

The chart below shows the relationship between exports and the dollar.

Of course, despite the “whooping and hollering” over the advance print of GDP at 2.9% on Friday, such exuberance may be a tad premature as the next chart shows the relationship between the dollar and the economy itself. 

This is particularly interesting given the recent number of companies trying to lay off weak earnings reports on the election. As Paul La Monica wrote this past week:

“This contentious and seemingly never-ending presidential election campaign makes me want to eat more comfort food to boost my spirits.

 

But maybe I’m alone. Executives from several food companies — as well as other big consumer brands — have warned in recent weeks that the Donald Trump versus Hillary Clinton battle for the White House is actually hurting their results.”

Whether it was the CEO of Dunkin’ Brands (DNKN), which owns both Dunkin’ Donuts and ice cream chain Baskin-Robbins, McDonald’s (MCD), YUM! Brands (YUM) or Popeye’s Louisiana Chicken (PLKI), they all pulled the excuse the election was hurting their results.

As Paul goes on to state:

“Really? It seems hard to imagine that people are passing up the opportunity to have an iced coffee and a cronut or some fried chicken and cheeseburgers just because they are scared of what either a President Trump or Clinton would do to the economy.”

Paul is absolutely right. The poor results from restaurants or consumer good related companies like Apple and Amazon aren’t missing results due to the election, but rather these are early signs of a consumer that is being impacted by they triple whammy of rising borrowing costs, weak wage growth and spiraling health care costs thanks to the “Un-Affordable Care Act.”

Of course, this is clearly seen in the report from the National Restaurant Association as consumers are forced to choose between eating out or paying for health care costs.

“Due in large part to declines in both same-store sales and customer traffic, the National Restaurant Association’s Restaurant Performance Index (RPI) fell below 100 in August.”

“The RPI fell below 100 for the first time in eight months, as a result of broad-based declines in the current situation indicators. Restaurant operators reported net declines in both same-store sales and customer traffic in August, along with corresponding dips in the labor indicators.

 

The RPI is constructed so that the health of the restaurant industry is measured in relation to a steady-state level of 100. The Restaurant Performance Index consists of two components – the Current Situation Index and the Expectations Index. Current Situation Index Fell 1.9 Percent in August to a Level of 98.6; Expectations Index Edged Down 0.2 Percent to a Level of 100.6.”

While no one is watching or worrying about the dollar right now, I can assure you they will be soon if the rise continues.

---

10-Year Treasury Beats Yellen To The Punch

Wall Street has put pretty high odds on Janet Yellen hiking rates come December. To wit:

“While the probability of a November rate-hike has collapsed to just 8.5% (as Dec holds around 65%) it appears regional Federal Reserves have a very different perspective of when Janet should hike. Nine of the Fed’s 12 regional banks sought a quarter-point increase in the discount rate in September, up from eight in August, based on minutes of their board meetings published by Fed. This is the same number as right before the December hike in 2015.”

The problem, however, is that every time the Federal Reserve has tried to hike rates over the last couple of years some form of “global instability” has cropped up that has kept them on hold. The problem, this time, is the “instability” may be domestic as the recent surge in the 10-year interest rate has front-ran the Fed in tightening monetary policy and putting the brakes on economic growth. 

As shown in the chart below, while rates remain in a very defined downtrend, each push to higher levels resulted in an economic slowdown with a bit of a lagged effect. With rates now as overbought as at any prior point, it is likely the “brakes” are already being applied and will show up in weaker retail sales, consumer spending, and capital investment reports in the not so distant future. 

As I pointed out in this past week’s report “Better Hope Rates Don’t Rise,” there are a litany of problems with higher rates:

1) Sharply rising rates will immediately curtail that growth as rising borrowing costs slows consumption.

2) The Federal Reserve currently runs the world’s largest hedge fund with over $4 Trillion in assets. 

3) People buy payments, not houses, and rising rates mean higher payments.

4) An increase in interest rates means higher borrowing costs which lead to lower profit margins for corporations. 

5) One of the main arguments of stock bulls over the last 8 years has been the stocks are cheap based on low interest rates. 

6) The massive derivatives market will be negatively impacted.

7) As rates increase so does the variable rate interest payments on credit cards. 

8) Rising defaults on debt service 

9) Commodities, which are very sensitive to the direction and strength of the global economy.

10) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. 

You get the idea.  The problem is that with economic growth already running at extremely weak levels, it won’t take much of a rise to put the overall economic underpinnings at risk.

---

Recession Risk On The Rise

Just recently, Deutsche Bank Chief U.S. Economist Joseph LaVorgna, wrote:

“That’s only the eighth time in nearly 40 years the index was down on a year-over-year basis. Of the seven previous occasions, four were soon followed by recession. (In the three other cases, two were false alarms, in 1986-87 and 1995-96, and in 1981 the recession began shortly before the annual change in the LMCI turned negative.)

 

The weakness in the LMCI indicates a rising possibility of recession. The upshot is that the economic outlook remains fragile despite the ostensible robustness of the labor market.”

I take a little different look at the LMCI by using a 12-month average of the monthly changes. What is notable is despite all of the cheering over monthly labor reports, which has been “quantity” over “quality,” what has been overlooked is the declining trend in the data.

It’s not just Deutsche bank that is warning about the fact we are very late in the current economic cycle, but also by former raging bull David Rosenberg in a recent Financial Post article:

“The yield curve is flattening. Leading economic indicators are sputtering. Uber-tight credit spreads and ultra-low cap rates in real estate serve as confirmations of late-cycle pricing.

 

Traditional valuation metrics for equities are every bit as high if not higher than they were in the Fall of 2007.

 

We are well past the peak in autos and just passed the peak of the housing cycle. Not just that but the broad measures of unemployment have stopped going down as well.

 

And the mega ‘Merger Mania’ we are seeing invariably takes place at or near cycle peaks, as companies realize that they can no longer grow their earnings organically. We have just witnessed five multi-billion dollar deals this past week alone — $207 billion globally (AT&T/Time Warner; TD Ameritrade/Scottrade) in what has been the most active announcement list since 1999 … what do you know, near the tail end of that tech bull market too.

 

We also were at the receiving end of a really disappointing consumer confidence report out of The Conference Board — sliding to a three-month low of 98.6 in October from 103.5 in September, the sharpest slide of the year.

 

And it wasn’t just the politics or gas prices — just a general malaise.

 

Assessments of business conditions now and perceptions for the next six months deteriorated significantly, as they did for the jobs market and spending intentions for homes and appliances.

 

This sentiment index generally peaks between 60% and 70% of the way through the cycle and so if that traditional pattern holds for this one, it would mean bracing for a recession to start any time from October 2017 to May 2018.

Forewarned is forearmed.“

This analysis confirms my previous suggestions we are approaching a recession sometime next year. With rising labor costs, interest rates and a stronger dollar, the Fed is on a collision course with a recession. This was noted by ECRI’s Lakshman Achuthan just recently:

“In a recent interview with Financial Sense, Achuthan, explains how demographics and slowing productivity are key to understanding long-term trend growth, something that monetary and fiscal policy may do little to change.

 

‘We’ve been in a growth rate cycle slowdown for almost two years now, where the broad measures of current economic activity, which define the business cycle or the economic cycle…are in a slowdown,’”

As I have repeatedly stated, you can not support higher interest rates, or have an inflationary pickup, without underlying economic growth.

“As you can see there is a very high correlation, not surprisingly, between the three major components (inflation, economic and wage growth) and the level of interest rates. Interest rates are not just a function of the investment market, but rather the level of “demand” for capital in the economy. When the economy is expanding organically, the demand for capital rises as businesses expand production to meet rising demand. Increased production leads to higher wages which in turn fosters more aggregate demand. As consumption increases, so does the ability for producers to charge higher prices (inflation) and for lenders to increase borrowing costs. (Currently, we do not have the type of inflation that leads to stronger economic growth, just inflation in the costs of living that sap consumer spending – Rent, Insurance, Health Care)”

“However, in the current economic environment, this is not the case.”

While many are predicting “no recession” in sight, the economic data currently does not support that call.

Why do we care? Because during recessions stocks have historically lost about 1/3rd of their value. After two previous bear markets since the turn of the century, you really can’t afford the risk of going through a third one.

As David said, “forewarned is forearmed.” 

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Market Needs Traction 

Michael Sincere had a very interesting post this past week in which he looked at the deterioration of the market.  He noted:

“Here’s something else to consider: For the past two years, the market has been in a sideways pattern, i.e., it’s eked out a small gain. Investors are getting anxious to generate any return on their money, just one of the many reasons they are dumping managed funds, and the reason they are desperately seeking yield. In my opinion, this is the time to be patient while waiting for the right opportunity. Anyone trying to force the market to give them money is going to be sorely disappointed in the near future.

 

Because Halloween and the election are drawing near, I don’t want to scare you. Nevertheless, the warning signs are everywhere. Once again, the strongest case for the bulls is the “invisible hand,” the entity that frequently spikes the indexes higher whenever the market starts to sell off. As I’ve said before, fear will overwhelm the invisible hand one day, but until then we can expect to get this drip-drip-drip type of selloff on low volatility.

 

Bottom line: The odds favor the bears in the near future. Keep your eye out for 2,130 on the S&P 500. If we drop below that level and the 200-day moving averages on the S&P 500, it could get nasty. Raise cash as we move closer to a correction. The biggest surprise is that we haven’t had one yet.”

I couldn’t agree more, and the market needs to get some traction quickly as crucial support is currently being tested.  As shown in the chart below, bullishness remains high despite the recent sideways action of the market, this provides fuel for a correction should something panic investors.

Furthermore, the deterioration in the breadth of the market is also concerning as shown above and below. With relative strength, momentum and breadth all on the decline, Michael is correct in stating the short-term outlook favors the bears momentarily, so caution is advised. 

With multiple sell signals in place, as shown throughout the entirety of this week’s newsletter, the call for next week remains higher cash levels and reduce levels of equity risk for now. When market dynamics change to a more constructive backdrop there will be plenty of time to increase allocations to equities with a more favorable risk/reward potential.

That is not the case right now.

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Conspiracy theories have swirled in recent days as to why FBI Director James Comey reopened Hillary’s email investigation after just closing it back in July concluding that, although Hillary had demonstrated gross negligence in her establishment of a private email server, that “no reasonable prosecutor” would bring a case against her.  Democrats, after lavishing Comey with praise for months on concluding his investigation in an “impartial” way, have since lashed out at him for seeking to influence the 2016 election cycle with Hillary herself describing his recent actions as “deeply troubling”.  Republicans, on the other hand, have praised Comey’s recent efforts as an attempt to correct a corrupt investigation that seemingly ignored critical evidence while granting numerous immunity agreements to Clinton staffers.

According to the Daily Mail, and a source close to James Comey, the decision, at least in part, came after he “could no longer resist mounting pressure by mutinous agents in the FBI” who “felt that he betrayed them and brought disgrace on the bureau by letting Hillary off with a slap on the wrist.”

James Comey’s decision to revive the investigation of Hillary Clinton’s email server and her handling of classified material came after he could no longer resist mounting pressure by mutinous agents in the FBI, including some of his top deputies, according to a source close to the embattled FBI director.

 

‘The atmosphere at the FBI has been toxic ever since Jim announced last July that he wouldn’t recommend an indictment against Hillary,’ said the source, a close friend who has known Comey for nearly two decades, shares family outings with him, and accompanies him to Catholic mass every week.

 

‘Some people, including department heads, stopped talking to Jim, and even ignored his greetings when they passed him in the hall,’ said the source. ‘They felt that he betrayed them and brought disgrace on the bureau by letting Hillary off with a slap on the wrist.’

 

According to the source, Comey fretted over the problem for months and discussed it at great length with his wife, Patrice.

 

He told his wife that he was depressed by the stack of resignation letters piling up on his desk from disaffected agents. The letters reminded him every day that morale in the FBI had hit rock bottom.

 

‘The people he trusts the most have been the angriest at him,’ the source continued. ‘And that includes his wife, Pat. She kept urging him to admit that he had been wrong when he refused to press charges against the former secretary of state.

Though we’re sure there are many facets behind Comey’s decision making process, we can all be quite certain, at this point, that he’s not motivated by a desire to make friends having now alienated just about everyone in Washington, both in law enforcement and in both political parties.  In fact, after Tim Kaine just last week praised Comey as a “wonderful” career public servant with the “highest standards of integrity”….

 

…everything has now been turned on it’s head with Hillary calling his latest moves “unprecedented and deeply troubling”…seemingly implying an attempt, on the part of Comey, to “rig” the election from Trump.

 

Meanwhile, President Obama and Attorney General Loretta Lynch are apparently also “furious” with Comey over his recent decision.

His announcement about the revived investigation, which came just 11 days before the presidential election, was greeted with shock and dismay by Attorney General Loretta Lynch and the prosecutors at the Justice Department.

 

‘Jim told me that Lynch and Obama are furious with him,’ the source said.

 

‘Lynch and Obama haven’t contacted Jim directly,’ said the source, ‘but they’ve made it crystal clear through third parties that they disapprove of his effort to save face.’

And while the decision to reopen the case may appease FBI agents and republicans, in the short-term, we suspect it does very little to restore overall faith in his competence.  As such, we continue to question just how long Comey can hold out before being forced to resign his post.  At a bare minimum, in light of his continued questionable judgement and serious doubts raised about the integrity of the first investigation, we fail to understand how an independent investigation into Hillary’s email server isn’t warranted.

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While we explained earlier today why the DOJ and FBI had found themselves in the awkward position of knowing that Anthony Weiner’s computer contained thousands of Huma Abedin emails sent from Hillary Clinton’s private server, yet were unable to access them, we noted it was only a matter of time before this particular hurdle was rectified. A few hours later, according to CBS’ Jeff Pegues, in the matter of the FBI having much needed access to begin poring over Weiner’s emails, which we now know number roughly 650,000 (and thus will take the FBI months to pore over), the FBI has just obtained the needed warrant.

#developing #fbi obtains #Warrant to search #Abedin‘s emails. #BREAKING follow @CBSNews

— Jeff Pegues (@jeffpeguescbs) October 30, 2016

 

As NBC confirms, the FBI obtained a warrant to search emails related to the Hillary Clinton private server probe that were discovered on ex-congressman Anthony Weiner’s laptop. The warrant came two days after FBI director James Comey revealed the existence of the emails, which law-enforcement sources said were linked to Weiner’s estranged wife, top Clinton aide Huma Abedin. The FBI already had a warrant to search Weiner’s laptop, but that only applied to evidence of his allegedly illicit communications with an underage girl.

The warrant came moments after Democratic Senate Minority Leader Harry Reid scolded Comey, saying in a letter that he “demonstrated a disturbing double standard for the treatment of sensitive information, with what appears to be clear intent to aid one political party over another.“

Reid added that his office determined that Comey may have violated the Hatch Act, which bars government officials from using their authority to influence elections.

The following screengrab from WaPo, perhaps summarizes best how the democrats’ take on things has changed dramatically over the past few weeks:

 

Meanwhile, the CBS reporter also noted that according to law enforcement sources HumaAbedin Is cooperating and “seemed surprised that emails were there.”

#developing #law enforcement sources also say #HumaAbedin Is cooperating and “seemed surprised that emails were there.”

— Jeff Pegues (@jeffpeguescbs) October 30, 2016

 

Finally, Pegues also points out that after having fieled much pressure from Democrats for the past 48 hours, FBI Director Comey has been quietly reaching out to members of Congress as pressure mounts on him.

#BREAKING News #FBI Director #Comey has been quietly reaching out to members of #Congress as pressure mounts on him.

— Jeff Pegues (@jeffpeguescbs) October 30, 2016

So will the FBI promptly announce that nothing of material important was found among Weiner’s emails, or will it now begin a protracted, intensive investigation? Will Comey resigns? Will Huma quit from her role in the Clinton campaign? Will Loretta Lynch take some of the blame? We hope to have some of these much needed answers in the coming days as the FBI’s reopened probe begins gaining traction.

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Submitted by Jonathan Newman via The Mises Institute,

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Submitted by Koos Jansen from BullionStar.com

In the Netherlands we have a financial newspaper that prints on pink paper and is named “Het Financieel Dagblad”. Basically it’s the Dutch equivalent of the Financial Times. A few weeks ago I was interviewed by two of their reporters, Joost van Kuppeveld and Lenneke Arts. Today the interview was published as part of a series of interviews with gold experts, among others, with myself and Aerdt Houben, Director Financial Markets at the Dutch central bank (DNB). Perhaps not surprisingly I disagree with several statements of Houben in his interview, to which I would like to respond in a forthcoming post. For now, you can read my interview below. In case readers didn’t know my real name is Jan Nieuwenhuijs, and Koos Jansen is my Internet alias. Het Financieel Dagblad preferred to disclose my real name.

Original source at Financieel Dagblad, published 29 October 2016. Translated by Koos Jansen.

Gold Is Going To Play A Role In A New Monetary System

Jan Nieuwenhuijs

Profession: Precious metals analyst at BullionStar.com

Owns gold since 2010

"The whole world is now in the same boat. Everywhere there are low interest rates and on all continents money is printed. Only the United States has paused printing for the moment.

There are many flaws in fiat money. You can print it without limitations, which is politically too tempting. Fiat money printing was used to save the financial system in 2008, but since then nothing has changed. Banks are not split. In a next crisis it’s going to end badly with paper money. There will be significant inflation.

Gold is a hard currency. It can't be printed – like fiat money. It is divisible and it does not perish. It retains its purchasing power in the long term. If it’s in the center of the monetary system, it will also be more stable in terms of purchasing power in the short and medium term. That has to do with economic principles; it is a commodity.

In that respect I feel safe by keeping a portion of my savings in physical gold. I am protected from economic shocks. If the euro falls gold rises, and so my purchasing power is maintained.

Something has to happen in the international monetary system. It cannot stay centred around the dollar. Since 1971 – when the dollar was detached from gold – the United States has an exorbitant privilege. Most trade in the world is settled in dollars. Therefore, there is a huge demand for dollars in the world, and the US can simply print these dollars.

In the new system gold is going  play a role. Look at the developments in Europe. The Netherlands and Germany get their gold back from America. Austria and Belgium are also repatriating. Russia and China buy a lot of gold. The Chinese have too many dollars in foreign exchange reserves and are therefore at the mercy of the whims of US policy. The transition to a new system will be gradual. No one wants a new shock.

With my blog I try to fill the gap between mainstream media, who do not understand gold, and conspiracy theorists. I always try to seek the truth. Because if we get a new financial crisis, we must know the truth. The Dutch central bank shouldn’t state it holds 600 tonnes if it can’t show us the audit reports and gold bar list. That's why I'm pushing for the audit reports and gold bars list to be publicly released, but those requests find a lot of resistance at my national bank. While you would think they can be fully transparent. What’s there to hide?"

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