Month: September 2018

Authored by Hal Snarr via The Mises Institute,

In a free society, income and wealth gaps are driven by variations in skill, knowledge, talents, independence, creativity, drive, and willingness to take risks. People who are satisfied with safe and secure occupations – like economics professor, school teacher, nurse, dentist or tax return preparer – expect to have much less wealth and income than risk-taking individuals who successfully capitalize on splendid ideas that result in products and services that benefit all of society. In this system, quantity, quality, and prices are determined by the demand and supply of goods and services.

The diagram below depicts one of many markets. The good or service being exchanged could be homes, X-rays, bank reserves, hours of low-skilled labor needed, tickets to Solo: A Star Wars Story, or, in this case, smartphones. Demand (the blue line) and supply (the red line) meet at the purple point. Assuming a free market system of no taxes, subsidies, price controls, regulations, prohibitions, government ownership, etc., 150 smartphones are produced and sold to 150 consumers at a price of $700.

The blue demand line represents a queue that sorts people according to their willingness to pay. The person with the lowest willingness to pay is at the right end of demand (the blue point). He or she is only willing to pay $200 for a smartphone. The person with the highest willingness to pay is at the left end of demand. He or she is willing to pay up to $1200. Whereas only one smartphone would be sold if the price is $1200, 300 smartphones would be sold at a price of $200.

The Economics of Government-Created Shortages

History is littered with examples of tyrants who start out as champions of the poor. Their political ascents begin with the pitting of the poor against the rich by using income and wealth gaps. They make claims that moguls and magnates have gotten rich because they charge unnecessarily high prices in an unfair market system that prices out the poor. In the figure above, for example, 150 consumers have smartphones, 150 do not. Champions of the poor can use such observation to win elections.

A common fairness policy that garners popular support is price setting (see here , here , here or here ). It can be in the form of a minimum wage on low-skilled labor, a maximum wage on skilled labor, a maximum or minimum price on final goods or factors of production, and a maximum or minimum price on bank reserves (e.g., the discount rate or interest on reserves). In the example, the likeliness of champions of the poor enacting a maximum price on smartphones is high since the number of the have-nots is equal to the number of the haves. If one of these champions is sufficiently charismatic, he or she can convince some of the haves to support a maximum price ceiling. If this results in a maximum price of $200 (the green line) everyone would want to buy a smartphone at this price (the blue point).

The red supply line determines the level of output that maximizes producer profit at various prices. Prior to the enactment of the price ceiling, profit is maximized when 150 smartphones are produced and sold for $700 each (the purple point). After the $200 price ceiling is set, profit is maximized (or loss is minimized) if 100 smartphones are produced (the red point). If this generates zero economic profits for producers, any other level of production at this price (or along the green line) yields economic losses for producers.

Make More Products Available at Lower Prices — Or Else!

The price ceiling has several unintended consequences. It creates a shortage of smartphones because consumers want to buy more smartphones than producers make. Since wealthy consumers are willing to pay a much higher price than the price ceiling, only the 100 wealthiest consumers can buy smartphones in the legitimate market using bribes or in the illegal black market. The prison population rises as bribes and black market commerce turn sellers and buyers into criminals. The middle class, the 50 consumers who could buy smartphones at the previous market price but cannot at the price ceiling, disappears as they become have-nots. The poorest 150 people, those unable to buy smartphones before the policy was enacted, are unable to buy them after the price ceiling is set.

With the policy swelling the ranks of the poor, there is growing pressure on their charismatic champion to fix the unintended consequences of his or her interventions. He or she needs to nudge or force producers to make enough smartphones for everyone at the artificially low price. Producers resist because that outcome (the blue point) generates economic losses. The charismatic champion of the poor implements additional interventions. He or she can subsidize these losses (see here) or nationalize the producers (see here). In either scenario, the economic losses of a government-owned enterprise or a subsidized private producer must be papered over with taxation or inflation. Whether the losses are subsidized with confiscated money from taxation or newly printed money from inflation, bad and profitable decisions are equally rewarded. This results in less innovation and entrepreneurship, a more rapid depreciation of techniques and equipment, and accelerating economic losses.

Since the charismatic champion of the poor is not going to raise taxes on the poor, and the former members of the middle class are now poor, he or she must raise taxes on the rich or inflate. If taxes are raised on moguls and magnates, they will flee the country. Understanding this, the charismatic champion of the poor opts for inflation (see here). To do this, the money supply is increased, which occurs when the champion of the poor directs the nation’s central bank to print new money to buy new Treasury bonds. With each period’s economic losses being pyramided on top of previous periods’, the money supply expands at a geometric pace. This causes the nation’s currency to devalue at an increasing rate.

The moguls and magnates that own commercial, rental, and personal property benefit from the inflation. As the rents they collect grow geometrically in inflation, the real value of their loan principle falls. In a few periods of sufficiently high inflation, inflated rents can be used to pay off loan principle or the equity inflation creates can be leveraged to acquire more property. They can also protect their wealth by purchasing safer currencies or precious metals, the poor cannot.

The policies that are intended to help the poor – rent control, price ceilings, and the minimum wage – harms the poor, destroys the middle class, widens wealth and income gaps, extinguishes innovation and entrepreneurship, and turns champions of the poor into tyrants.

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Seemingly unsatisfied with the fact that The FBI will not be interviewing everyone in the United States (living and dead), The Hill reports that Sen. Dianne Feinstein (Calif.), the ranking Democrat on the Senate Judiciary Committee, is calling for the White House and the FBI to release the written directive President Trump sent launching the investigation into Supreme Court nominee Brett Kavanaugh.

Feinstein sent a letter to White House counsel Don McGahn and FBI Director Christopher Wray on Sunday requesting that a copy of Trump’s written directive be released to the committee.

“Given the seriousness of the allegations before the Senate, I am writing to request that you provide the Senate Judiciary Committee with a copy of the written directive by the White House to the FBI,” Feinstein wrote.

She also requested that the bureau release the names of any additional witnesses or evidence that is included if FBI agents expand the original investigation.

Feinstein’s demands come shortly after President Trump raged about Democrats’ “Obstruct & Delay” tactics, pointing out that no matter what he does “it will never be enough for Democrats.”

Wow! Just starting to hear the Democrats, who are only thinking Obstruct and Delay, are starting to put out the word that the “time” and “scope” of FBI looking into Judge Kavanaugh and witnesses is not enough. Hello! For them, it will never be enough – stay tuned and watch!

— Donald J. Trump (@realDonaldTrump) September 30, 2018

And quite clearly the narrative is set as Deep Statist, and former FBI Director, James Comey called the seven-day time frame “idiotic,” while defending the FBI’s ability to investigate the allegations against Kavanaugh in a NYT op-ed.

“It is better to give professionals seven days to find facts than have no professional investigation at all,” Comey wrote in a Sunday op-ed for The New York Times.

“Agents can just do their work. Find facts. Speak truth to power.”

But, with regard to the Democrats’ new talking point – and clearly the angle that Feinstein is taking – regarding the ‘limiting’ of ther FBI investigation to ‘just’ one week, former Trump campaign adviser Michael Caputo made a quite insightful comment that has yet to produce a credible response from the left.

Caputo said Sunday on CNN that one week should be plenty of time to investigate the sexual misconduct claims brought forward by Christine Blasey Ford and two other women.

“We all know the FBI looked at 650,000 of Hillary Clinton’s emails in just 24 to 36 hours so it’ll just take a week,” Caputo said.

Caputo noted it took three days in 1991 for the FBI to investigate Anita Hill’s claims that Supreme Court Justice Clarence Thomas, who was then a nominee, had sexually harassed her.

However, Republicans are not taking this bullshit lying down as Slate.com reports that raging Lindsey Graham, speaking on ABC’s This Week today,  called for an investigation into Senator Feinstein’s handling of how Christine Blasey Ford’s allegations came to light.

“We’re going to do a wholesale and full-scale investigation of what I think was a despicable process,” Graham said.

He listed the issues he wanted to look into: “Who betrayed Dr. Ford’s trust; who in Feinstein’s office recommended Katz as a lawyer; why did Ms. Ford not know that the committee was willing to go to California?”

Sen. Lindsey Graham tells @GStephanopoulos he’s going to call for an investigation into “a despicable process,” including “who in Feinstein’s office” referred Christine Blasey Ford to her attorney Debra Katz and “who betrayed Dr. Ford’s trust” https://t.co/sCbeD4PudT #ThisWeek pic.twitter.com/0NrHlu4OjZ

— ABC News Politics (@ABCPolitics) September 30, 2018

One last thing…

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Authored by Bill Bonner via Bonner & Partners,

We arrive at the end of the week.

Yesterday morning, the yard crew were putting up a stake on the Capitol lawn and laying around it a supply of tinder.

It was to be a small fire… hot and slow.

Brett Kavanaugh was duly tied to the post with his eyes wide open… neither offering an apology nor appealing to God for redemption.

Strike the Match

The first match was struck when Christine Blasey Ford took the oath and began her “high-stakes testimony” to a panel of grave-looking senators, each pretending that the fate of the nation hung in the balance.

Ms. Ford played along, citing the “civic duty” that required her to tell what happened to her in a suburban bedroom 36 years ago.

Ms. Ford says Mr. Kavanaugh tried to ravish her. Mr. Kavanaugh denies it. Obviously, one of them is bearing false witness.

And the august committee, along with the entire nation, was invited to spend another 100 million hours of its most precious and most irreplaceable resource – time – guessing which.

Committee members went to great lengths to treat Ms. Ford with the kind of cautious respect usually reserved for armed maniacs. None wanted to join Mr. Kavanaugh on the stake. They applauded her “courage” and thanked her as a heroine for coming forward.

We had our doubts. We wondered what a truly brave woman would have done. And is it really such a good idea to eliminate Supreme Court justices based on disturbing old memories that can’t be proven?

Shouldn’t she have told her parents… risking their displeasure, but getting a chance to right a wrong? Or maybe even forgotten the “uproarious laughter”… and shrugged off the incident as a learning experience? (Don’t go to parties with drunken teenagers!)

Instead, Ms. Ford turned the laughter into background music – almost a theme song – for her whole life. It explained so much, she said: her troubles in college and her troubles with men… therapy… and even her profession.

And now, with the whole nation looking… she had an opportunity to finally turn off the dreadful sound… to finally get even… to finally get justice… and to finally confirm that all her tears and fears were authentic and worthwhile.

What a glorious moment in the history of reality TV! Ms. Ford… girlish, even in her fifties… and still fragile and vulnerable…

But she was taking down a Supreme Court nominee, damaging his career, reputation, and dignity. And it was all on the basis of such an antique recollection; like an old sofa, surely it has been reupholstered, maybe several times. Mr. Kavanaugh didn’t seem to recognize it.

But the day’s circus events ended satisfactorily. The cameras smiled and the gawkers were pleased as Mr. Kavanaugh cried out in pain and anger as the flames roasted his feet.

“The whole thing just makes me sick,” said a friend.

Here at the Diary, we have no way of knowing whether Mr. Kavanaugh is an angel or a devil. But who cares; the stakes are trivial.

In the past, Supreme Court nominees weren’t asked how they treated their wives or what they got up to as teenagers. Many were probably cads or scoundrels; somehow, the Republic survived. One more rascal is not going to make any difference.

The real problem is that the Supreme Court has been derelict in its duty for the last 80 years.

It has failed to defend the Constitution against what Eisenhower called “unwarranted influence,” and what we call the Deep State.

And today, nobody who would pose a serious threat to the Deep State – Republican or Democrat – would be allowed anywhere near a seat on the court.

Show Goes On

Meanwhile, the show goes on. The U.S. is going in the hole at a rate of $4 billion every business day. Both the bull market on Wall Street and the expansion on Main Street are nearing an end – with $250 trillion of debt outstanding worldwide.

And the president thinks Canada – Canada, with whom we have no trade deficit – has been cheating the U.S. for decades.

He also thinks the U.S. loses $800 billion a year in bad trade deals (we send foreigners fake money; they send us real goods).

But he told the United Nations that the U.S. economy is doing great…

And the Fed is delusional, too. As good as this economy is, it thinks it can make it even better by raising its key interest rate, putting it about even with consumer price inflation.

Early in the century, the whole silly spectacle would have been preposterous.

Nobody cared about a Supreme Court justice’s teenage sex life; they only cared if he was a decent judge. Nobody cared what the president thought of trade between Canada and the U.S.; it was none of his business.

And nobody would have imagined that POTUS would tell them with whom they could do business (the U.S. now “sanctions” some 30 different countries)…

Or that the Fed – we didn’t even have a central bank until 1913 – would decide who made money and who didn’t, transferring $4 trillion of fake money to the rich and not a dime to the working classes.

But that was then. This is now.

And today, we live with a Carnival of Claptrap that never stops.

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DEA agents discover another small town in America’s Rust Belt with an overabundance of opioids

The Drug Enforcement Administration (DEA) last week conducted inspections at several pharmacy locations in the Clay County, Tennessee town of Celina, following a massive spike of painkiller purchases from drug distribution companies.

According to the sales data, obtained by the DEA, several pharmacies purchased nearly 1.5 million pills in 2017, a number that is considered an anomaly of a rural area in America’s Rust Belt region.

Home to just 7,800 people, the pharmacies last year purchased enough opioids to provide 270 pain pills for every man, woman, and child living in the small Tennessee town.

In response to the opioid crisis, the DEA is now aggressively monitoring supply chains of pill distributors that primarily feed into hard-hit states.

“DEA’s action today is one of many proactive measures we are taking to help prevent drug diversion, abuse, and trafficking that end lives and destroy families and communities,” said Louisville Division Special Agent in Charge Chris Evans, who runs DEA operations in Tennessee, West Virginia, and Kentucky.

“When DEA sees abnormal patterns such as this one, we must act. Too many rural communities like Clay County are often targets for both addicts and drug traffickers who exploit the most vulnerable and who profit from addiction. We’ve lost too many Americans to opioid abuse,” Evans said.

Notice of inspection was issued to Anderson Hometown Pharmacy, LLC at 151 MacArthur Avenue, and Walgreens at 1000 Gainesville Highway. The DEA said an administrative inspection warrant was also issued to another pharmacy, Clay County Express Pharmacy, LLC at 651 Brown Street. Some of these inspections included a complete review of receipts and distributions, employee interviews, and all other pharmacy activities.

Last week, the Centers for Disease Control reported that drug overdose deaths in 2017 were up 7% from 2016 and that more than 72,000 American died the previous year — that is more than American soldier deaths in the Vietnam War (58,220 US military fatal casualties). This is a more than 200% increase over a decade. Of those overdose deaths, just over 49,000 were from synthetic opioids, which include prescription painkillers, heroin, fentanyl, and fentanyl analogs. Pain management, then pill abuse, is often the starting point for heroin and fentanyl addicts.

Days ago, we reported a similar incident in Williamson, West Virginia, where two pharmacies just four blocks apart pumped 20.8 million prescription painkillers in a town of only 3,191 residents.

It was reported that in December 2002 to January 2010, more than 335,000 prescriptions for painkillers were issued by Dr. Katherine Hoover at a small clinic in the struggling West Virginia town, a rate of about 130 per day.

Williamson is a small blue-collar city of some 3,000 residents just across the Tug Fork River from Kentucky. When the coal industry collapsed, it left behind many miners – many of whom were already reliant on painkillers.

However, like Williamson, Clay County is similar, both areas are located in America’s Rust Belt, where de-industrialization and high unemployment fuels the deadly cycle of addiction.

Now, these lost and forgotten towns in the Rust Belt are being pumped with record amounts of opioids by large pharmaceutical firms, who then in return, have local doctors and pharmacies dish out painkillers to residents.

Yet while the DEA is finally cracking down on opioid abuse, the one question left is: why did the government allow pharmaceutical companies and pill mills to pump millions of highly addictive opioids into the Rust Belt in the first place?

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Authored by Andrew Syrios via The Mises Institute,

The Left has become increasingly and often bizarrely obsessed with all manners of supposed privilege these days. Buzzfeed even put out a quiz on how much privilege you have. All of these various privileges work to form a simple Marxist-like dichotomy between the oppressed and the oppressor. So for whites, men, heterosexuals, Christians, cisgendered, able-bodied and attractive people are all at least privileged if not part of an oppressor class. On the other hand, people of color, women, homosexuals, the disabled, Muslims and people of other faiths, transgendered, overweight people and presumably otherkins, headmates, and whatever other buzzwords the self-diagnosed crowd has come up with, are oppressed.

It’s hard to imagine a more effective way to increase division in society than by splitting everyone into different groups that are either good or bad, privileged or oppressed. And this division is then inevitably followed up by demanding a government solution to these inequities. One of the most obviously glaring omissions is that what made up the bulk of Marxist theory, namely the rich versus poor, hardly gets mentioned.

Indeed, one of the first things that came to mind with the recent proposals in South Africa to expropriate the land of white farmers without compensation is that no such proposals were being made for expropriating the land or assets of wealthy corporations. Perhaps that’s because wealth corporations can better defend themselves (or flee). Or perhaps it’s because class is far more fluid than things such as race. (Unless of course, you’re Rachel Dolezal).

One of the most remarkable failures of Marxist theory (of which there were many) was that Marx believed the revolutions would begin in the most advanced capitalist countries . This would imply a revolution was most likely to spring up in a country like Germany, the United States, Britain or France. Instead, the communists took over in far more backward countries that were still either partly or almost totally feudal, such as Russia and China.

In hindsight, this should have been obvious. Feudalism creates a strict hierarchal and static society where class is effectively something you are born into. Indeed, it is interesting to ponder whether it was the religious justification of the caste system that prevented a communist revolution from taking place in India. When class is something you cannot change, class warfare becomes a more appealing alternative. And while capitalism is a spectacularly more effective way to organize a society than communism, even the most ardent supporters of a free market will admit it takes time for class restrictions to fade and for a country to become wealthy after transitioning from a feudal or semi-feudal economy into a capitalist one.

For peasants who have lived under feudal lords and the like for ages, the false promises of communism were understandably more appealing.

However, even with all the government favors and restrictions hampering the economy, there is still upward mobility in capitalist nations. One study in the United States, for example, found that only five percent of those in the bottom quintile of income in 1975 remained there in 1991. And when age is taken into account, income and wealth disparities look far less stark . Despite terrible incentives from the welfare state, most of the poor don’t stay poor. And almost everyone at least has dreams and aspirations of moving up the ladder. In capitalist nations, class is not something you are stuck with.

In the current age, we can see how the use of class as a rallying cry mostly failed as Occupy Wallstreet quickly petered out and lost steam. Indeed, many Leftists have lost interest in class as it is generally the white working class in the United States who supported Trump and the white working class in Britain who supported Brexit.

In Occupy Wallstreet’s wake came the most deranged form of identity politics one could possibly imagine. And by focusing on immutable qualities (or qualities presumed to be immutable), the Left has fixed the pesky problem that class mobility created for their dreams of an ever-bigger state apparatus.

As noted above, modern day social justice warriors divvy everyone up according to various immutable or semi-immutable characteristics. You are either privileged and need to repent (give away your money, job, etc.) or oppressed and are owed something. Many of their arguments are simply ridiculous. For example, gender is a social construct but being fat is genetic. Others mute complex issues into simplistic dichotomies. Two of the most obvious are religion and gender.

In 2016, the Center for Studies on New Religions found that Christianity was the most persecuted religion in the world with 90,000 being killed for their religion. While Christianity is also the largest faith, this doesn’t exactly ring of privilege. And while it’s true, that being a Christian is probably a privilege of sorts in rural Montana, it’s not going to grant you much in Midtown Manhattan, Silicon Valley or Hollywood. Christianity seems to be the one religion you can make fun of these days. After all, a painting of Christ in urine is called “art” and sponsored by the National Endowment of the Arts (your tax dollars at work!) while a guy in Britain is imprisoned (and later died) for putting a bacon sandwich outside a Mosque.

With gender, at least in the West, it would seem rather obvious that there are advantages and disadvantages both genders have. Even if you assume the genders are biologically the same and all differences are a social construct (while there are also 57 different biological genders), the results would not imply privilege.

Yes, men make up 95 percent of Nobel prize winners, 95 percent of Fortune 500 CEO’s and 68 percent of STEM majors. But men also make up 93 percent of the incarcerated, just shy of 80 percent of suicides and 70 percentof the homeless. Feminists could push back and say that men get arrested more because they commit more crimes (that presumably the patriarchy made them do). But how does a man become a Fortune 500 CEO? Does it not require a lot of hard work and intelligence? And is anyone going to seriously claim that men are privileged when it comes to the divorce courts?

Feminists may challenge that men are in charge so any advantages to women are just “benevolent sexism.” But this retort would only be coherent if men and women were two collective beings. Each man and woman is, of course, just an individual and even though most of those in charge are men, the average man has as much ability to change the world as the average woman; close to zero. Every advantage and disadvantage men have is just the hand men were dealt.

Some of the same things could be said about whites, especially when whites can be discriminated against with affirmative action. And then there’s always that pesky question as to why Asian Americans earn more than whites if they’re, you know, being oppressed and all. Or perhaps Asian Americans are privileged too as they are now discriminated against by affirmative action as well.

Of course, this whole mess becomes even more complex when you realize you can be both an oppressor and oppressed at the same time. A white woman is privileged by her race and oppressed by her gender. This forms the “Kyriarchy” (yes, that’s a real term) of intersectionality where all these oppressions and privileges meet in one giant wheel of humanities majors pretending they are actual scientists who have come up with something that isn’t really, really stupid.

Indeed, the complexities and utter irrationality of intersectionalism is pretty easy to show. Do I, as a white man, stay privileged if I move to Japan or am I now an oppressed minority? Are the Japanese in Japan who oppose immigration “Japanese supremacists?”

While there have obviously been many major crimes committed by the West (or more accurately, Western governments), the West is by no means unique in these crimes nor immune to them. As someone with Greek ancestry, I could point to the Greek Genocide committed by the Ottoman Turks during the First World War (better known as the Armenian genocide, as approximately 1.5 million Armenians were killed along with 600,000 Greeks). I could demand redress from the “Turkish supremacists” as well as the return of Constantinople, of course. Or did my Greek ancestors have “white privilege” while they were being exterminated?

One example probably best highlights the absurdities of intersectionalism better than any other. In 2014, it came out that in Britain, in the town of Rotherham, mostly Pakistani gangs had groomed and raped over 1,400 girls over the course of almost 20 years. The police had known about these crimes but had ignored them. To say this was a national scandal (and proof of massive government incompetence) is a huge understatement.

In 2016, the very white and very male Brock Turner , a Stanford student with a scholarship for swimming, sexually assaulted a classmate and was given a lenient sentence. While this was a terrible crime, in a country with 325 million people, it would seem to be, at best, a local story.

Instead, it blew up into a national flash point against the dreaded and evil patriarchy. Feminists wrote story after story about it. Rotherham on the other hand… not so much. Here are thesearch results for the feminist site Feministing.com:

For Jezebel.com, the count was:

• Rotherham : 3

• Brock Turner : 38

• Manspreading : 15

Intersectionality sure is complicated.

The only interpretation one can come to is that there is no attempt whatsoever to be consistent or even coherent. It’s simply about divvying people up into groups to demand the state take from another to give to you. It is Bastiat’s second option; “everyone plunders everyone.” But with a twist; first you must pick a team before you begin the attempts at plunder.

In essence, privilegenomics doesn’t even attempt to come up with an economic rationale for redistribution and bigger government. It’s just mere tribalism and a demand to take other’s stuff for historical grievances, some real and some imagined, but almost all done to and by people who have long since passed away.

It shouldn’t be hard to see why this nonsense has acted as a sort of rocket fuel for the Alt-Right. Some people can only be told how privileged and awful they are for so long before deciding to identify with a collective themselves that wants to grow the state for their own benefit. But the Alt Right is clearly a reaction to the Left’s madness. Discrediting the former should diminish if not eliminate the latter.

Regardless, it is now more important than ever for individualism to win out.

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A disturbing divergence in market outlooks has emerged in recent weeks, as US retail investors scramble to allocate more cash into the stock market, even as institutions sound the alarm and warn that price gains for the coming quarter will be limited.

After the best quarter for the S&P in 5 years, retail investors have flooded back into stocks, drawing down cash balances at brokerage accounts to record lows even as strategists at big banks from Goldman, to Citi, to Morgan Stanley and JPMorgan have recommended fading the rally in American stocks while forecasting the second-weakest year-end period of the market’s now-record long bull run. And, as we enter Q4, sellside analysts, traditionally cheerleaders for further market gains, look “timid”, and according to the average year-end S&P 500 target of 2,956, they forecast just a 1.4% gain in the fourth quarter. That would be the worst close to a year since 2012.

The story is familiar: “alarms are ringing” across Wall Street as Bloomberg puts it, as strategists continue to warn over peaking growth, trade tensions and stretched valuations. As a result, institutional and professional investors are hunkering down in anticipation of what comes next. Two weeks ago, we reported that Morgan Stanley’s hedge fund clients slashed the net exposure and leverage to the lowest level this year, a sign that risk appetite is retreating, just as the market pushed on to new all time highs.

Even one of the biggest bulls on Wall Street, BMO’s Brian Belski, has refused to raise his year-end price target of 2,950 for the S&P 500 amid concern that investors may have flocked to stocks in anticipation of a year-end rally that could be delayed by the political turmoil in Washington and the mid-term elections.

“Given the strong momentum of U.S. stocks, many clients have asked why we have not become more optimistic,” Belski wrote in a note Thursday. “We believe investors may have already ‘pulled forward’ any anticipated post-midterm election bump.”

Traditional mid-year election comparisons have also flown out of the window. According to Belski’s calculations, in midterm years the market starts the year slowly before rallying in the final quarter, with the final three months delivereding on average gains twice as big as those in non-midterm years. Needless to say, this year has been an outlier, with the S&P starting off January with a blow-off top, then suffering a near correction in February, before rallying another 9% through the end of September, “compared with an average loss of 1.7 percent at this time in midterm election years.”

Historical patterns aside, strategists are also concerned about the accelerating pace of Fed tightening and balance sheet shrinkage, which this quarter will ramp up by another $10 billion and hit a peak $50 billion a month as Treasuries and MBS holdings mature.

With earnings forecasts still on the rise and the Federal Reserve in no hurry to slow the pace of tightening, the market is unlikely to repeat the same pace of gains in coming months, according to John Augustine, chief investment officer who helps oversee $17 billion at Huntington Private Bank in Columbus, Ohio.

Meanwhile, stocks are hardly cheap, trading at 16.8x forecast earnings, a multiple that’s 14% higher than its 10-year average. Worse, according to Goldman Sachs, the market is not only “expensive on most metrics”, it is in the 89% percentile of aggregate overvaluations, while on a median basis when looked at traditional valuation metrics, stocks are more expensive than 97% of all historical observations.

“We’re probably seeing the peaking moment in the economy and earnings growth,” Augustine said. “Does it mean markets deteriorate? No. But stocks probably have done their bulk of work this year.”

Yet despite Wall Street’s warnings, retail investors not only ignore the tales of caution, but have become increasingly oblivious to any downside risks, in a repeat of what happened at the start of the year when the S&P 500 suffered its worst correction in two years.

As a result, retail investors have poured into the market as confirmed by the record low levels of cash at retail and discount brokers such as Charles Schwab, where cash as a percentage of client assets fell to 10.4%, matching the record low level reached in January (back then, just a few days later, the S&P plunged as a result of the VIXplosion that wiped out inverse VIX ETFs and countless vol sellers).

The main difference between January and now is the growing divergence between professional investors, who are growing more pessimistic by the day, even as retail investors refuse to slow down their ETF-buying ways which in turn continue to “lift all boats.”

To some, such as David Campbell of San Fran-based BOS, the lack of consensus is good news for American stocks.

“I don’t really worry about markets when there is a lot of skepticism. I worry about markets when I don’t see anybody being skeptical,” Campbell told Bloomberg. “The longer bull markets go, the more people who have been sitting on the sideline feel like they’re missing out. So there is built up pressure to give in and participate.”

Of course, with record low cash in brokerage accounts, the purchasing power on the “sidelines” have never been less. 

As for the who is proven right in the end, professional or “mom and pop” investors, in a world in which such former hedge fund titans as David Einhorn are now down 26% YTD, it has become virtually impossible to assume that just because they are “less informed”, retail investors will lose.

At the same time, one can make the argument that what we are seeing now is institutions and insiders simply dumping to euphoric retail investors at a record pace that suggests the manic phase is almost over.

And when looking at the historical record, every time this process reached its inevitable end, the rug would be pulled out from under the market, at which point the furious retail liquidations began as institutions once again stepped in and the cycle would repeat itself. There is no reason why this time should be different. 

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Authored by Lance Roberts via RealInvestmentAdvice.com,

A Pause That Refreshes?

That was so last week,

“Get out your party hats ladies and gentlemen, the markets hit all-time highs.

After increasing equity exposure in portfolios on the 11th, as the markets pulled back to the previous break-out support levels, I suggested a push to new highs was likely.”

The one thing that we addressed several times last week on our daily podcasts was the short-term overbought condition needed to be resolved before the markets could make a year-end push to 3000.

There has been a pretty well defined upward trendline (black dashed line) since the April lows which has consistently provided better entry opportunities to increase equity exposure.

While we are currently fully weighted in existing portfolios, we must take advantage of these entry points to “on-board” new clients. This is always the biggest challenge for any advisor.

As stated, our existing portfolios are currently fully weighted toward equity risk as there seems to be little which can derail this market currently. We have moved stop-loss levels up to recent lows, added some defensive positioning, and have added bonds as rates have climbed above 3%.

Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.

There is also a reasonable match with oil prices.

This is particularly interesting with respect to the ongoing bullish narrative. Tariffs, higher interest rates, and higher oil prices are ultimately a direct tax on the consumer. Such will ultimately weigh on consumption, earnings, and the economy.

Another concern for the rally is the participation continues to narrow. Small caps, after leading the rally higher from the March lows have lost their “mojo.” 

Same for Mid-cap stocks.

This suggests that much of the “speculative” nature of the market seen early this year has subsided and risk is being concentrated into fewer areas.

As Steven Vanelli via Knowledge Leaders Capital blog noted on Friday

“Small caps have underperformed mid/large caps by about 5% since making a relative high June 21, 2018. There is support nearby, but if small caps underperform US mid/large caps by another 5%, then the technical picture could change for the worse.”

But there is more to this story than just relative underperformance. As Jesse Felder noted in his blog last week, breadth is becoming decidedly more bearish.

“Over the past ten days, this exchange has triggered an omen every day. Such a streak has not happened over at least the past 40 years. This brings the total number of omens triggered on both exchanges over the past month to 15, the most since December of 1999, just before the peak of the Dotcom Mania.”

“Even more notable, it brings the total omens triggered over the past year to 44, by far the most in at least 40 years and roughly doubles the total seen almost 20 years ago. The only thing to conclude from this is that we are currently seeing a historic divergence in equity market breadth, the sort of dispersion that has typically preceded broader market turbulence.”

So, the real question is whether the recent struggles with the market are simply just a pause that refreshes or the early stages of a more important topping process?

Over the past 50-years, when the market has posted a new high, failed, and then posted a subsequent high at the same time the Federal Reserve, and long-term rates, were rising – it was a significantly more important topping process.

1972 – Prior to the 1973-1974 bear market.

1999 – Prior to the Dot.com crash

2007 – Prior to the Financial Crisis

Today

It is too early to know just yet whether we are just experiencing a pause that refreshes or if we are at the beginnings of a more important juncture between rates and the markets. We will only know for sure in hindsight. 

For now, there is really no one is really concerned with the risks. As Dr. Ed Yardeni noted last week:

“The latest relief rally reflects mounting confidence that Trump’s trade war won’t escalate into one that depresses the economy and corporate earnings, which continue to soar. In addition, there is less fear lately that the Fed’s policy normalization will trip up the bull market. Earlier this year, there was fear that a 10-year US Treasury bond yield above 3.00% would be bearish for stocks. It recently rose back slightly above that level, yet it was widely deemed to be bullish for financial stocks. Go figure!”

He is right, which is why we have remained allocated to equities and have been opportunistic in adding exposure.

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The uncertainties in the real estate market are causing people to shell out big bucks – sometimes over $10,000 per month –  to rent properties, instead of purchasing them, according to the New York Times. The report followed several couples who are prime examples of this trend, like Aimee Raupp-Temple and her husband, Ken Temple. They chose to rent instead of buy when they moved to the suburbs of Connecticut three years ago because they weren’t sure if they were going to stay. Now, after realizing that they did in fact like the area, they still decided to rent instead of buy.

The couple, whose patriarch works in finance, did so because they are convinced that home prices would continue to decline.

Aimee told the New York Times: “Our parents’ mentality was, you bought your home and that was your major profit place. Now, I think people are a little more cautious.” In fact, the real estate market appears so uncertain that many people are spending between $5,000 to $10,000 a month to rent because it actually feels like a safer bet than buying. This is especially true for suburban counties like Fairfield and Westchester, where median home sale prices can be above $1 million. The demand for single-family rentals is up not just in Connecticut, but across the broader region surrounding New York.

Many potential buyers are waiting to see how the market will pan out. Their concerns are new federal tax laws and general unease about the economy in an environment where the Fed continues to hike rates.

Aimee continued, “There are so many other ways to invest and make money than real estate now.”

The numbers confirm the trend: in Fairfield County, single-family rentals are up 13% in July compared to a year ago, according to data from the appraisal firm Miller Samuel. In Westchester County, there were similar results: single-family rentals were up 9.6%. This growth in rentals has been the most pronounced with higher-end buyers. An “exploding rental market” was the term used in a report put together by William Pitt/Julia B. Fee Sotheby’s International Realty.

This firm’s data shows that for the first half of 2018, homes that rented for $5,000 or more in the county were up 33% compared to 2015. Out of the 268 total properties, 61 of them rented for $10,000 or more, which was a 35% increase over 2015.

In other affluent areas like New Canaan, Darien, Greenwich and Westport, the lowest range of rental homes are generally older properties that have three or four bedrooms and a regular sized yard. The houses that are closer to $10,000 a month usually have at least five bedrooms and large lots – sometimes with beach locations and amenities.

Westchester County showed similar results in higher-end rentals, but at a slightly slower pace of growth at just over 12%. The growth there was focused on the southern end of the county, similar to other areas.

Kathleen Collins, an agent with William Pitt, told the Times: “I definitely see an increase in interest in rentals in the Bronxville area.” Collins said she had been approached by more real estate agents than usual this year, asking whether not property she had for sale may be available to rent.

Meeting the demand are high-end sellers who are now open to the idea of renting. Those who can’t stomach the sale price they want are even more enticed to rent. In Fairfield County, the number of homes offered for rent at $5,000 and up during the first half of this year was 25% higher than five years ago, according to data from William Pitt. Inventory was up 18%. William Pitt noted that renting is a way to cut potential losses, as well as meet demand. For instance, if homeowners sell a primary residence for less than it was bought for, the loss isn’t tax-deductible. But, if the homeowner rents it for at least two years, it can be legally converted to an investment property and capital losses from it can be written off in the future.

The growth in demand for these types of rentals has been further catalyzed by concerns about new tax law, which caps income tax deductions for property, state and local taxes at $10,000. Further fueling the nervousness, according to Jonathan Miller, the president of Miller Samuel, is unclear economic policy and rising interest rates.

“We’re going through this era of uncertainty. And what do buyers do when the near-term seems uncertain? They pause. People are just nervous that values will continue to decline, and for that reason, more people are opting to rent, if they are not forced to buy”, Miller said.

And while demand for rents is rising, traditional purchases are fading fast. In many of the same counties, buyers are simply unmotivated. In New Canaan, property values have declined by 10% to 12% over the last year. At the same time, the number of sales is down by 15%.

* * *

The article also tells the story of another couple, Michelle and Jeremy Fine, who signed a two year lease in March for a five bedroom house in the Old Hill section of Westport. The couple has two children and were previously living in a rented condo in White Plains before they decided not to buy it because of property tax reasons. They stated that the change in federal tax law was definitely a factor for them to rent. 

Michelle Fine told the NY Times: “I don’t believe you’re spending that much more on rent than you would on a mortgage. Being in a home you purchased that is not the right fit is a bigger challenge if you have to sell. You have to weigh out what’s more important.”

Todd David Miller, a vice president of sales at the Higgins Group, told the New York times that of the $57 million that his sales team has done this year in Westport and Fairfield, almost all the sellers have moved out of state or are renting in the area instead. Those who are staying are moving toward rental homes near the beach.

“These are mainly higher-end transactions, and the majority of them had to sell at a loss, They don’t want to put any more money into real estate right now,” he said.

Leslie Razook, an agent with William Pitt, echoed this sentiment for New Canaan and Greenwich. 

Another couple, Scott and Nina Ackerman, decided not to buy after selling their home in Rye, New York where they lived for 17 years. While they noted there was ample supply for homes in the area, they couldn’t find what they wanted and figured they wouldn’t force the issue. Renting seemed like a good alternative. They are doing it now in a four-bedroom home for $7,000 a month. Scott stated, “Home prices seem to be coming our way. We made a good sale, and I think we’re going to have an opportunity.”

But the home buying market hasn’t dried up completely, despite this seismic shift that appears to be taking place.

Harper and Scott Mates are a younger couple who spent a year renting a seven bedroom house in Rye, New York before deciding to buy. Coming from the city with young children, they wanted to stay close to their job but they weren’t sure of the location. Unlike the other couples, they fell in love with the area and jumped at the opportunity to purchase a five bedroom house on an acre of land within a couple of days it was listed.

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Authored by Jeffrey Snider via Alhambra Investment Partners,

There are more than 300 PhD Economists working on staff for the Federal Reserve. The central bank tells us that they “represent an exceptionally diverse range of interests and specific areas of expertise.” Perhaps, but they are all PhD Economists, aren’t they? These highly educated people cover a broad range of topics, for sure, and all from the same starting point and perspective.

Believe it or not, the Fed has an entire research section devoted to Prices and Wages. It’s difficult to process given for four years we’ve heard from FOMC officials about the link between prices and wages starting from the unemployment rate. And we are still waiting for that forecast link to show itself.

That’s the problem when PhD’s are advising PhD’s about conclusions they’ve already drawn ahead of time. Economists may be diverse in their interests but their ideology prevents any sort of honest inquiry of discovery. Echo chamber.

The Section’s Chief is Dr. Kristin Hubrich, with Matteo Luciani her Chief Economist. Dr. Luciani’s current research topic, according to the Federal Reserve, isn’t the relationship between business profitability and wage growth, thus inflation in or out of a Phillips Curve setting, rather it is Non Stationary Dynamic Factor Models. But of course it is.

They feel the need to build better models because some of those we have now aren’t sufficient. I don’t mean the Fed’s models which have missed every big economic swing since they were first introduced, rather Dr. Luciani takes issue with other statistical constructions like GDP and GDI.

According to a paper he co-authored with Matteo Barigozzi of the London School of Economics for the Federal Reserve Board earlier this year, over the past few years GDP and GDI together may have been understating growth. If the two Matteo’s are right, there was little or no downturn in 2015-16, no labor market slowdown thereafter, and the unemployment rate isn’t just a fanciful picture of an incomplete denominator.

Yellen was right all along – if you just change the numbers.

In this note, we introduce a new estimate of GDO [Gross Domestic Output] obtained from a Non-Stationary Dynamic Factor model estimated on a large dataset of US macroeconomic indicators. Compared to the approaches of the BEA and the Philadelphia Fed, our estimate of GDO incorporates information coming from a wider spectrum of the economy, and this additional information empirically proves to be non-trivial. Indeed, our estimate of GDO offers a different picture of economic activity: according to our estimate, since 2010 quarterly annualized GDO growth was on average 1/2 of a percentage point higher than estimated by the BEA or the Philadelphia Fed, thus showing a more rapid pace of improvement than measured by national account statistics.

This kind of investigation isn’t unique at the Fed nor any other research division from another central bank. This is what they do. Maybe they have so much time to dream about saving Economics because our actual economic predicament is really straightforward and easy to demonstrate.

Despite this economic boom, workers and therefore consumers don’t appear to be benefiting much from it. If they aren’t, it really can’t be much of a boom.

This isn’t a new development, but the situation has worsened since that last downturn more than two years ago. Incomes have tracked the participation problem closely, but that doesn’t explain 2016 and onward when the unemployment rate dived lower than any models anticipated. Aggregate labor income continues to be stagnant even with that rate around and below 4%.

The Personal Income and Spending update for August 2018, released by the BEA today, shows for still another month nothing has changed. Income growth is tepid and is in fact less than spending, meaning that even factoring the revisions to Proprietors’ Income at the last benchmark incomes don’t come anywhere close to matching the unemployment rate.

This is where the constant supply of mainstream anecdotes about a LABOR SHORTAGE!!! backfires. Each one only proves that companies are doing everything they can except to pay more for workers. It’s almost as if they can’t pay for them – which is exactly what’s going on here.

Again, this is pretty simple economics (small “e”), requiring no doctorate or formal economic training to appreciate.

At times when companies don’t make money, profit growth slows or reverses, they pay very close attention to their costs. This is about as uncontroversial as it gets. They may even be forced into extreme adjustments like layoffs if their bottom lines are really threatened.

Businesses may also simply refuse to hire many more workers or pay a lot for them as well as their existing labor force. If profitability is in doubt, the last thing any company will do is be aggressive on costs. Labor is almost always the biggest cost.

While the 2015-16 downturn was a manufacturing recession, it was also a profit recession, too. In other words, while not all businesses were tied to the fortunes of crashing commodity prices they were impacted nonetheless.

They tightened up their cost practices and aggregate income growth even contracted ever so slightly for eight months (after October 2015), an even bigger contraction in non-linear terms. That was the full reach of the downswing.

Profits have never really come back, though. As noted yesterday, profits aren’t any higher in the latest data for Q2 2018 than they were in 2014 nor are they really that much more than 2012. The “rising dollar” downturn may not have visited a profit recession on everyone, but it does seem to have been a wakeup call that economic recovery wasn’t going to show up even after QE3 and QE4.

Indeed, the sluggish profit recovery in the rest of 2016 and 2017 merely confirmed the lack of acceleration and therefore explains the persistent reluctance of businesses, in the aggregate, to pay an accelerating wage for marginal labor. There is practically no demand for marginal labor regardless of the wage.

If you struggle to make money, you don’t hire more workers nor enthusiastically bid up the price for them. It is just that simple: economics, not Economics. Not only is it simple, that’s what all the data shows.

Rather than appreciate this honest, consistent, and corroborated verdict, 300 PhD’s are doing what? They sure aren’t investigating why QE failed 4 times (just here in the US) to change the economic and therefore profit picture for businesses. They don’t seem all that interested in this as a possibility, even in the Prices and Wages Section.

Say what you want about Milton Friedman on the topic of inflation and monetary policies, but he got this part right:

The difficulty of having people understand monetary theory is very simple – the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case – the story – in a way that is favorable to the central banks.

No kidding.

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