Month: September 2018

Authored by Mac Slavo via SHTFplan.com,

In his new book titled  “The Deep State: How an army of bureaucrats protected Barack Obama and is working to destroy Donald Trump,” Jason Chaffetz alleges that the deep state is very real. 

His book, which is set to be published on September 18, details the lengths the intelligence community is going to in an attempt to undermine Trump.

“The Deep State is real,” Chaffetz wrote, according to the Salt Lake Tribune. 

“They don’t like exposure, accountability or responsibility. They fight back, outlast and work the system for their advantage. And they certainly don’t like disruptive forces such as Donald Trump.”

Of course, this flies in the face of ‘lying’ former FBI Director James Comey, who exclaimed in May that:

“There is no deep state, but there’s a deep culture and commitment to the rule of law that runs all the way down through not just the Department of Justice and the FBI but the military services and the intelligence community. It would be interesting to see what would happen next,” 

Chaffetz, a former congressman from Utah, resigned from Congress in June 2017. At the time, that was about six months into Trump’s presidency. Chaffetz then decided to take a job as a political analyst for the FOX News Channel and the FOX Business Network, according to USA Today.

Chaffetz says that the devastating Benghazi incident is what uncovered a larger problem in the corrupt government.

“Without exposing Benghazi we might never have learned that Hillary Clinton was using her private email server to conduct government business and transmit classified information,” Chaffetz wrote.

“Benghazi was a symptom of a much deeper problem at the State Department. Their decisions were based not on a security calculation, but on a political one.” 

Chaffetz also tosses the Department of Justice firmly under the bus in his book as well. The DOJ is a frequent target of both Trump and the House Freedom Caucus.

“The DOJ should be protecting us,” Chaffetz wrote.

“And yet it is the federal agency that stands head and shoulders above the rest in enabling the Swamp.”

The leftists both in political positions and amongst the public see Chaffetz as going after Obama while allowing Trump to run free.

 “Despite issuing a steady stream of far-reaching subpoenas during the Obama Administration, the Oversight Committee has essentially gone dormant under the Trump Administration, and Chairman Chaffetz’s successor has not issued a single subpoena to anyone, on any issue, ever,” Elijah Cummings, a Democrat from Maryland and the top Democrat on the  House oversight panel said.

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One week after a war of words erupted between Bernie Sanders and Jeff Bezos, the vendetta between the Vermont Senator and the world’s richest man escalated on Wednesday when Sanders introduced a Senate bill called the “Stop BEZOS Act”, that would require large employers like Amazon and Walmart to pay back the government for food stamps, public housing, Medicaid and other federal assistance received by their workers.

The bill’s acronym is a direct dig at Bezos and stands for Bad Employers by Zeroing Out Subsidies Act. It seeks to establish a 100% tax on government benefits received by workers at companies with at least 500 employees, Sanders said on Wednesday according to the Washington Post.

“In other words, the taxpayers of this country would no longer be subsidizing the wealthiest people in this country who are paying their workers inadequate wages,” Sanders said at a press conference announcing the bill. “Despite low unemployment, we end up having tens of millions of Americans working at wages that are just so low that they can’t adequately take care of their families.”

The proposed bill came one day after Amazon briefly hit $1 trillion in market cap, just a month after Apple did the same, although a quick look at recent price appreciation suggests that Amazon will soon eclipse even Apple to become the world’s most valueable company.

Bezos, who founded Amazon, is the world’s wealthiest man: he has added $67 billion to his fortune in 2018, giving him a $167 billion net worth on the Bloomberg Billionaires Index. The median Amazon worker, meanwhile, was paid $28,446 last year, according to company filings.

The increase in Bezos’ wealth has outpaced the rest of the billionaires tracked by Bloomberg by an obscene margin.

Some other statistics putting Bezos’ $167BN in context, courtesy of Bloomberg:

• It’s more than the entire market capitalization of FedEx Corp.
• Bezos’s gain this year alone would make him the seventh-richest person on Earth, ahead of Mexico’s Carlos Slim and Alphabet Inc.’s Larry Page and Sergey Brin.
• It’s about the equivalent of Walt Disney Co.’s blockbuster bid for most of the assets of 21st Century Fox Inc.
• His wealth has increased by an average of about $8 million an hour in 2018.
• It’s roughly 10 times Amazon’s total net income since it went public in 1997.
• The 499 other billionaires on the Bloomberg ranking have added a net combined $8.3 billion to their fortunes this year.

None of this was lost on Sanders who on Tuesday tweeted that “Amazon is worth $1 TRILLION,” adding that “Thousands of Amazon workers have to rely on food stamps, Medicaid and public housing to survive. That is what a rigged economy looks like.”

In a surprising retaliation, last week Amazon publicly fired back against Sanders and his claims that thousands of Amazon employees rely on federal benefits to make ends meet. Those figures are “inaccurate and misleading,” the company said last week, because they include temporary workers as well as those who choose to work part time.

Amazon’s answer did not dent Sanders’ enthusiasm to redistribute some of Bezos’ wealth, and according to the WaPo a spokesman for Sanders said the senator’s office had heard from hundreds of current and former Amazon workers in recent weeks who had to rely on food stamps, Medicaid and other government programs to cover their families’ basic needs. There is no official measure of a “living wage,” but the federal poverty level for a family of four is currently $24,600.

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Authored by John Rubino via DollarCollapse.com,

2008 has special significance for gold bugs, both because of the money they lost in August of that year and the money they made in the half-decade that followed. Today’s world is beginning to feel eerily similar.

Let’s start with a little background. The mid-2000s economy boomed in part because artificially low interest rates had ignited a housing mania which featured a huge increase in “subprime” mortgage lending. This – as all subprime lending binges eventually do – began to unravel in 2007. The consensus view was that subprime was “peripheral” and therefore unimportant. Here’s Fed Chair Ben Bernanke giving ever-credulous CNBC the benefit of his vast bubble experience.

The experts were catastrophically wrong, and in 2008 the periphery crisis spread to the core, threatening to kill the brand-name banks that had grown to dominate the US and Europe. The markets panicked, with even gold and silver (normally hedges against exactly this kind of financial crisis) plunging along with everything else. Gold lost about 20% of its market value in a single month:

Gold mining stocks – always more volatile than the underlying metal – lost about half their value.

Silver also fell harder than gold, taking the gold/silver ratio from around 50 to above 80 — meaning that it took 80 ounces of silver to buy an ounce of gold.

The world’s governments reacted to the crisis by cutting interest rates to record lows and flooding the financial system with credit. And precious metals and related mining stocks took off on an epic bull market. So it’s easy to see why the investors thus enriched look back on 2008 with nostalgia.

source: tradingeconomics.com

Is History Repeating?

Now fast forward to Autumn 2018. The global economy is booming because of artificially low interest rates and massive lending to all kinds of subprime borrowers. One group of them – the emerging market countries – made the mistake of borrowing trillions of US dollars in the hope that the greenback would keep falling versus their national currencies, thus giving them a profitable carry trade.

Instead the dollar is rising, threatening to bankrupt a growing list of these countries – which, crucially, owe their now unmanageable debts to US and European banks. The peripheral crisis, once again, is moving to the core.

And once again, gold and especially silver are getting whacked. This morning the gold/silver ratio popped back above the 2008 level.

So are we back there again? Maybe. Some of the big western banks would probably fail if several major emerging markets default on their debts. And historically – at least since the 1990s – the major central banks have responded to this kind of threat with lower rates, loan guarantees and, more recently, massive and coordinated financial asset purchases.

So watch the Fed. If the EM crisis leads to talk of suspending the rate increase program and possibly restarting QE, then we’re off to the races. Just like 2008.

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As part of an extensive, cross-asset effort summarizing JPMorgan’s views in a 168-page report issued to commemorate a decade of the Lehman failure, and titled appropriately “Ten Years After the Global Financial Crisis: A Changed World”, JPMorgan head quant has published a section in which we lays out his thought on “What the next crisis will look like.”

To frequent readers of Kolanovic, the report is very similar to a similar effort he put together last October, in which he also previewed the “next crisis” – which he dubbed the Great Liquidity Crisis – and said would be defined by severe liquidity disruptions resulting from market developments since the last including i) decreased AUM of strategies that buy value assets; ii) Tail risk of private assets; iii) Increased AUM of strategies that sell on “autopilot”; iv) Liquidity-provision trends; v) Miscalculation of portfolio risk and vi) Valuation excesses.

Fast forward to today when despite his recently optimistic shift, Kolanovic reiterates many of the same underlying apocalyptic themes, making one wonder just how “tactical” his recent bullish bias has been.

Echoing what he said last October, Kolanovic writes that “the main attribute of the next crisis will likely be severe liquidity disruptions resulting from market developments since the last crisis”.  A key feature of this market transformation, is the shift from active to passive investment, and the prevalence of trend-following investors and market makers, which “reduces the ability of the market to prevent large drawdowns.” In some bad news for the risk-parity crowd, Kolanovic writes that “in multi-asset portfolios, the ability of bonds to offset equity losses will be reduced” while PE firms won’t be spared either as private assets that are less frequently marked to market may understate the true risk exposure of portfolios. Combining these views with his core competency, market volatility, Kolanovic writes that “these factors may lead to a miscalculation of true risk due to a reliance on recent volatility as the main measure of portfolio risk.“

Which is an odd statement for Kolanovic to make considering the just two weeks ago, he was pushing the lack of market vol as a key support pillar for his continued bullish outlook on the market.

Cognitive dissonance aside, it is a breath of fresh air to glimpse a return of the old, “skeptical” Kolanovic, even if it is in the context of a strategic piece, while he maintains his bullish facade when it comes to his periodic tactical reports.

In any case, here is what Kolanovic thins the next crisis will looks like, as excerpted from the broader JPMorgan report.

* * *

What will the next crisis look like?

This year marks the 10th anniversary of the 2008 Global Financial Crisis (GFC) and also the 50th anniversary of the 1968 global protests. Currently, there are financial and social parallels to both of these events. Leading into the 2008 GFC, some financial institutions underwrote products with excessive leverage in real estate investments. The collapse of liquidity in these products impaired balance sheets, and governments backstopped the crisis. Soon enough governments themselves were propped by extraordinary monetary stimulus from central banks. Central banks purchased ~US$10 trillion of financial assets, mostly government obligations. This accommodation is now expected to reverse, starting meaningfully in 2019. Such outflows (or lack of new inflows) could lead to asset declines and liquidity disruptions, and potentially cause a financial crisis.

We will call this hypothetical crisis the “Great Liquidity Crisis” (GLC). The timing will largely be determined by the pace of central bank normalization, business cycle dynamics, and various idiosyncratic events such as escalation of trade war waged by the current U.S. administration. However, timing of this potential crisis is uncertain. This is similar to the 2008 GFC, when those that accurately predicted the nature of the GFC started doing so around 2006. We think the main attribute of the next crisis will be severe liquidity disruptions resulting from these market developments since the last crisis:

• Shift from Active to Passive Investment. We have highlighted the growth in passive investment through ETFs, indexation, swaps, and quant funds over the past decade, transforming equity market structure and trading volumes. For instance, as of May 2018, total ETF assets under management (AUM) reached US$5.0 trillion globally, up from US$0.8 trillion in 2008. We estimate that Indexed funds now account for 35-45% of equity AUM globally, while Quant Funds comprise an additional 15-20% of equity AUM. With active management declining to only one-third of equity AUM, we estimate that active single-name trading accounts for only ~10% of trading volume. We estimate ~90% of trading volume comes from Quant, Index, ETFs, and Options. The shift from active to passive asset management, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns. Figure 1 illustrates the trend in passive assets, showing the growth of passive equity fund AUM as a % of total equity fund assets since 2005.

• The ~US$2 trillion rotation from active and value to passive and momentum strategies since the last crisis eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption. Figure 2 highlights the inflows into passive equity funds since 2010 compared to outflows from active equity funds.

• Increased AUM of strategies that sell on “autopilot.” Over the past decade there was strong growth in Passive and Systematic strategies that rely on momentum and asset volatility to determine the level of risk taking (e.g., volatility targeting, risk parity, trend following, option hedging, etc.). A market shock would prompt these strategies to programmatically sell into weakness. For example, we estimate that futures-based strategies grew by ~US$1 trillion over the past decade, and options-based hedging strategies increased their potential selling impact from ~3 days of average futures volume to ~7 days of average volume.
• Trends in liquidity provision. The model of liquidity provision changed in a close analogy to the shift from active/value to passive/momentum. In market making, this has been a shift from human market makers that are slower and often rely on valuations (reversion) to programmatic liquidity that is faster and relies on volatility-based VAR to quickly adjust the amount of risk taking (liquidity provision). This trend strengthens momentum and reduces day-to-day volatility, but it increases the risk of disruptions such as the ones we saw on a smaller scale in May 2010, October 2014, and August 2015. Figure 3 highlights the decline in S&P 500 e-mini futures market depth following a volatility spike, measured against VIX. S&P futures represent the largest liquidity pool for broad equity market exposure.

• Miscalculation of portfolio risk. Over the past two decades, most risk models were (correctly) counting on bonds to offset equity risk. At the turning point of monetary accommodation, this assumption will most likely fail. This increases tail risk for multi-asset portfolios. An analogy is with the 2008 failure of endowment models that assumed Emerging Markets, Commodities, Real Estate, and other asset classes were not highly correlated to DM Equities. In the next crisis, Bonds likely will not be able to offset equity losses (due to low rates and already large CB balance sheets). Another risk miscalculation is related to the use of volatility as the only measure of portfolio risk. Very expensive assets often have very low volatility, and despite the downside, risks are deemed perfectly safe by these models.
• Tail risk of private assets: Outflows from active value investors may be related to an increase in Private Assets (Private Equity, Real Estate, and Illiquid Credit holdings). Over the past two decades, pension fund allocations to public equity decreased by ~10%, and holdings of Private Assets increased by ~20%. Similar to public value assets, private assets draw performance from valuation discounts and liquidity risk premia. Private assets reduce day-to-day volatility of a portfolio but add liquidity-driven tail risk. Unlike the market for public value assets, liquidity in private assets may be disrupted for much longer during a crisis.
• Valuation excesses. Given the extended period of monetary accommodation, many assets are at the high end of their historical valuations. This is visible in sectors most directly comparable to bonds (e.g., credit, low volatility stocks), as well as technology and internet-related stocks. (Sign of excesses include multi-billion dollar valuations for smartphone apps or for initial cryptocurrency offerings that in many cases have very questionable value). Following the large U.S. fiscal stimulus, strong earnings growth reduced equity valuations to long-term average levels. Valuations came down in other pockets of excess such as Cryptocurrencies and several hyper growth stocks. Despite more reasonable valuations, equity markets may not hold up should monetary tightening continue, particularly if it is accompanied by toxic populism and business disruptive trade wars.
• Rise of populism, protectionism, and trade wars. While populism has been on the rise for several years, this year we have started to see its significant negative effect on financial markets as trade tensions have risen between the U.S. and numerous countries. The great risk of trade wars is their delayed impact. The combination of a delayed impact from rising interest rates and a disruption of global trade have the potential to become catalysts for the next market crisis and economic recession.

Kolanovic’ conclusion:

We believe that the next financial crisis will involve many of the features above, sparking the Great Liquidity Crisis (GLC), and addressing them on a portfolio level may mitigate their impact. It remains to be seen how governments and central banks will respond in the scenario of a great liquidity crisis. If the standard interest rate cutting and bond purchases do not suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor. Other “out of the box” solutions could include a negative income tax (one can call this “QE for labor”), progressive corporate tax, universal income, and others. To address growing pressure on labor from artificial intelligence, new taxes or settlements may be levied on technology companies (for instance, they may be required to pick up the social tab for labor destruction brought about by artificial intelligence, in an analogy to industrial companies addressing environmental impacts). While unlikely, a tail risk could be a backlash against central banks that prompts significant changes in the monetary system. In many possible outcomes, inflation is likely to pick up.

The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, polarized, and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from liberal to alt-right movements to conspiracy theorists and agents of adversary foreign powers. In fact, many recent developments such as the U.S. presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis.

How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article “the death of equities” in 1979.

To summarized: financial apocalypse with a dash of civil war thrown in for good measure. But there’s time. Until then, don’t forget to BTFD.

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Authored by Daniel Lacalle via DLacalle.com,

The biggest mistakes in analysing macroeconomic data is to assume causality to factors that are just catalysts.

Don’t blame the Fed or Trump. That is just noise. The problem of emerging markets is largely self-inflicted and comes after years of raising imbalances, both at a trade and fiscal level, based on impossible expectations of growth and demand.

The Federal Reserve has warned for two years about rising rates and policy normalization. Yet governments ignored this and continued to increase imbalances as well as rising debt in US dollars.

Governments always consider that economic problems come from lack of demand, and they assign themselves the task of “correcting” that wrong assumption by massively increasing deficits and using monetary policy well beyond any logical measure.

India’s rising populist policies are part of the nation’s current problems.

Recent data is quite concerning.

August Nikkei Services PMI came at 51.5 vs 54.2 in the previous month, a 5% monthly drop.

Sovereign bond yields are at the highest level since 2014.

Industrial production and growth estimates are coming down (via Focus Economics).

Trade deficit in July 2018 was the highest since 2013. India’s trade deficit widened to USD 18.02 billion, the largest trade gap since May 2013, as imports jumped 28.81 percent.

According to Kotak Economic Research, India’s current account deficit is forecast to be the highest in six years. Under a $65 a barrel oil price scenario, the current account deficit is likely to be 2.4% of GDP, higher than in 2013-14. As oil prices rise, and imports soar, the overall balance of payments is moving into larger deficits than expected, as capital inflows weaken and are unable to current account deficit.

Another warning comes from the maturities in foreign exchange. Nearly $220 billion of short-term debt, equal to more than half of India’s foreign exchange reserves, will come up for maturity in 2018-2019 fiscal year. Moody’s states that India is one of the countries that are least exposed to a rising US dollar. However, Moody’s did not expect the rupee to fall this much.

The average maturity of debt is close to 10 years and over 96 per cent of it is in local currency, according to Moody’s. However, it also notes the country’s low debt affordability. Given that the vast majority of debt is in local currency, the incentive to depreciate the rupee is very high.

Foreign exchange reserves remain acceptable, but are falling rapidly. From $426 billion in April to $403 billion in August, foreign exchange reserves are likely to suffer another dipas the rupee falls against the US dollar.

At the same time, 68% of fiscal deficit target for 2019 consumed in the first quarter. 

India expects a fiscal deficit of 3.3% of GDP in 2018-19 that seems quite challenging, given the weakening of data and the rise in expenses. Deficit was revised up to 3.5% of GDP in 2017-18.

The combination of wider trade and fiscal deficits added to lower reserves makes the currency weaken severely. The rupee keeps plummeting to all-time lows vs the USD, as we explained in WIO News (watch).

India’s government usually solves this equation increasing subsidies and raising taxes. That combination will not work in a world that has lower tolerance for fiscal and trade imbalances and a risk-off scenario. Additionally, tax wedge is already a high burden. As Prateek Agrawal notes, “if one looks at GST and taxes on the affluent sections, India would rank as one of the highest taxed countries globally. For consumption, these sections are actually paying close to 60 per cent of the income as taxes).

Additionally, printing more rupees is not going to solve the challenges.

The situation in India is not as desperate as in Turkey or Argentina, because FX reserves are not being depleted at high rate, but the trend is concerning and the outlook for growth, trade and fiscal balances is weakening.

The government has prefered to raise taxes and increase spending, and the demonetisation policy was a big mistake (read). All the cash that was taken out of the system came back a few months later. It is time for India to change its historical policies of subsidising the low productivity sectors to penalize the high productivity ones with more taxes.

India can easily navigate this turmoil if it changes some misguided demand-side policies. The question is, will the government do it? Or will they prefer to blame an external enemy and increase the imbalances?

If the government decides to ignore these issues, India could become the biggest risk in emerging markets and for the world economy.

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The US Justice Department confirmed that it has expressed “growing concern” that social media companies are “hurting competition” and “intentionally stifling the exchange of ideas on their platforms.”

The comments came after Facebook COO Sheryl Sandberg and Twitter CEO Jack Dorsey testified to the Senate Intelligence Committee on Wednesday, as lawmakers investigate foreign influence campaigns on their platforms. Social media companies are under the spotlight accused of either censoring conservative accounts or for allowing threat actors, usually allegedly working closely with the Russian and Iranian governments, to use disinformation spreading tactics to try to influence the outcome of the election.

“We listened to today’s Senate Select Committee on Intelligence hearing on Foreign Influence Operations’ Use of Social Media Platforms closely,” Justice Dept spokesman Devin O’Malley said in statement.

“The Attorney General has convened a meeting with a number of state attorneys general this month to discuss a growing concern that these companies may be hurting competition and intentionally stifling the free exchange of ideas on their platforms,” said Justice Department spokesman Devin O’Malley in an email.

It wasn’t clear if the DOJ’s contention is similar to that of the president, who has repeatedly accused social media of censorship of conservative and republican accounts, or if it will be more focused on the so-called infiltration of social media by “Russian bots.” It also wasn’t clear if the DOJ is pushing for regulation or investigating the platforms for alleged anti-trust issues.

Social media companies aren’t covered under US free speech laws like the First Amendment, but have long said they support free speech and expression across their platforms, including for users in parts of the world where freedom of speech is more restrictive.

NEW: AG Sessions “has convened a meeting with a number of state attorneys general this month to discuss a growing concern that these companies may be hurting competition and intentionally stifling the free exchange of ideas on their platforms,” DOJ spokesperson says. pic.twitter.com/2TybUMjqxP

— ABC News (@ABC) September 5, 2018

 

 

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