Month: August 2022

Following two quarters of negative GDP growth – which is definitely not a recession remember – The Atlanta Fed’s GDPNOW model initiated its Q3 GDP forecast for the US economy at +2.1% on July 29th.

However, after this morning’s data, The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.3 percent on August 1, down from 2.1 percent on July 29.

Following the Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the US Census Bureau, the nowcasts of third-quarter real personal consumption expenditures growth and real gross private domestic investment growth declined from 2.5 percent and -1.4 percent, respectively, to 1.5 percent and -2.1 percent, respectively.

So to summarize – we are a third of the way to a 3rd negative quarterly GDP print after just one day of data in Q3.

But of course, 3 negative quarters of GDP would absolutely, definitely not be a recession remember.

Finally, in case you needed any convincing, this morning’s ISM data had some interesting subcomponent action under the surface.

As @charliebilello notes, the last 4 times the spread between New Orders and Inventories in the ISM Manufacturing Index was this negative, the US was already in a recession. The 2001, 1990-91, and 1981-82 recessions never had readings this low…

But of course, it’s different this time right… because President Biden is in office?

Via Greg Hunter’s USAWatchdog.com,

A few months back, precious metals expert and financial writer Bill Holter predicted the economy was going to tank, and today, the U.S. is officially in a recession. 

Holter says it’s not just America buckling under enormous debt, but the entire world.  Holter explains, “This is only the start…”

“They are trying to debate whether or not we are in a recession, but it’s pretty much a lock.  Yes, we are in a recession.  And this is not just the U.S.  This is a global problem…

Let me put his into perspective.  If you add up all the global GDP’s, we are roughly $100 trillion.  The problem is there is well over $350 trillion in debt worldwide…When I graduated college… anything above 100% debt to GDP was considered a banana republic.  Look where we are today.  Globally, it’s 350% debt to GDP.  What that tells me is the world is a banana republic.”

So, it’s no surprise big money is getting out of fiat currencies like the U.S. dollar.  Less than a month ago, Holter, who is also a precious metals broker for Miles Franklin, brokered what looks like the biggest U.S. silver coin deal in history.  Just the Silver Eagle portion of the deal was 650,000 coins, which was only part of the $50 million deal.  Only $27 million of that could be bought in U.S. incremented silver coins.  (The rest was used to buy gold U.S. coins.)  Holter says that cleared out the wholesale market for U.S. silver coins, including so-called junk silver.  Holter contends,

“That shows you how thin it really is.  By the way, a fair portion, 15% or so, was future deliveries from the mint.  So, we basically cleaned up the next four to eight weeks of Silver Eagle deliveries.  They belong to us, and we are still waiting for delivery from the mint. . . . The client wanted U.S. coin.  In the U.S., that is the best form of silver ownership.  We did not touch bars, generics or foreign sovereigns.  So, there is still much more out there to be bought, but how much?   I think $1 billion would buy all the available silver in the U.S.  Think about it.  A billion dollars today is not even the mustard on a ham sandwich. . . . Make no mistake, this deal was a big hit to the inventory . . . of U.S. silver coins. . . . This paper Ponzi scheme is going to come down, and the best place to hide is gold and silver.”

On housing, Holter says it has topped and predicts,

“Now, there are no bids, and homeowners are lowering the price.  It was a virtuous cycle to the upside.  Now, it’s reversed, and it will be a virtuous cycle to hell on the downside…

I say hell because there is so much debt outstanding, it will create margin calls across the board.”

Holter is still predicting a Mad Max apocalyptic future that looks more and more like a real possibility.  Holter says,

“We have had free and carefree times for the last 40 years.  Now, you are going to see the reverse.  Debt is a two-edge sword, and after 40 years, we are going to see the dangerous side of the sword… There is going to be starvation.  This is going to be unlike anything…anyone has even written about from a fictional basis. . . . I’ll be surprised if we make it through this year with the real economy functioning as it is right now.  

Supply chains will break down . . . We will have some dire markets leading to . . . market closures and bank closures.”

There is much more in the 44 min interview.

Join Greg Hunter as he goes One-on-One with financial writer and precious metals expert Bill Holter of JSMineset.com for 7.26.22. 

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Days after the UK warned that the risk for nuclear war is higher today than even during the Cold War due to lack of communication between rival nuclear-armed superpowers, Russian President Vladimir Putin in Monday remarks said “there can be no winners” in nuclear war, stressing it “must never be unleashed” on the world.

Putin’s words came just as Russian media sources reported the Biden administration has offered to open talks with Moscow over a “new arms control framework” that could replace the New START (Strategic Arms Reduction Treaty).

The past half-decade has witnessed the deterioration and ultimately abandonment of some key Cold War era arms treaties, in addition to the collapse of monitoring agreements like ‘Open Skies’ – which the US recently pulled out of.

Discussing the Treaty on the Non-Proliferation of Nuclear Weapons, or NPT, Putin said on Monday, “As a state party to the NPT and one of its depositories, Russia consistently follows the letter and spirit of the Treaty.”

“Our obligations under bilateral agreements with the United States on the reduction and limitation of relevant weapons have also been fully fulfilled,” he continued. “We proceed from the fact that there can be no winners in a nuclear war, and it must never be unleashed, and we stand for equal and indivisible security for all members of the global community.”

On the same day, UN Secretary General António Guterres warned that humanity is “one miscalculation away from nuclear annihilation”. Thus it appears the UN chief and Putin are on the same page… a rare moment. He said the following upon the start of a conference of countries belonging to the nuclear Non-Proliferation Treaty (NPT) in New York:

“We have been extraordinarily lucky so far. But luck is not a strategy. Nor is it a shield from geopolitical tensions boiling over into nuclear conflict,” Guterres said at the start of a conference of countries belonging to the nuclear Non-Proliferation Treaty (NPT).

“Today, humanity is just one misunderstanding, one miscalculation away from nuclear annihilation,” he said, calling on nations to “put humanity on a new path towards a world free of nuclear weapons”.

Within the first two months of the Russian invasion, there were widespread reports and speculation that Putin ordered his armed forces to enter a heightened state of nuclear readiness. Later, top Russian officials vowed they will not use nukes in Ukraine.

Another hotspot, and potential new showdown between nuclear-armed superpowers, is now opening up in southeast Asia ahead of House Speaker Nancy Pelosi’s potential ultra-provocative visit to the self-ruled island of Taiwan. China is starting fresh military drills across from Taiwan, warning it is prepared to possibly deter any US military escort over the region. Independent journalist Michael Tracy summarized the current US posture in the world as follows:

At present the US is intimately involved in at least four “ticking time bomb” hotspots that could trigger wider conflict — Taiwan, Ukraine, Serbia/Kosovo, Iran — but the real problem of course is rampant “isolationism”

— Michael Tracey (@mtracey) August 1, 2022

Indeed, stalled negotiations of an Iran nuclear deal are hanging by a thread, also with border tensions soaring between Serbia and Kosovo, which Serbia’s president warning the military is ready to respond – also as Russia and NATO line up behind the rival enemy sides.

By Michael Msika and Jan-Patrick Barnert, Bloomberg Markets Live commentators and reporters

There’s little time to savor the brisk rally we’ve just seen in European stocks, as the market enters what is usually the worst time of the year. To add to the ominous history, there are significant technical hurdles lying ahead.

The Stoxx 600 soared 7.6% in July, the best month since November 2020. But as August and September usually deliver poor returns for stock bulls, with the worst returns over the past 25 years, some caution is warranted.

“Markets are rallying on the hope the Fed can prevent a hard landing, brushing off the risk that the slowdown accelerates and causes further headwinds to corporate fundamentals,” say Barclays strategists led by Emmanuel Cau. “This rally feels unsettling to us, we would fade it.”

The view is echoed by Goldman Sachs strategists led by Sharon Bell. The market is “too complacent” following the bounce, given downside risks related to Russian gas supply and Italian politics, while earnings estimates need to fall further, they say.

The move higher in equities has been supported by a reassuring earnings season to date, with 57% of Stoxx 600 companies beating estimates, EPS growth running at 3% year-on-year and surprising positively by 2%, according to JPMorgan strategists. Still, five out of the 11 sectors are serving up negative EPS growth: financials, real estate, discretionary, tech and communication services.

Charts signal that there are obstacles ahead, with a trend line in place that’s acting as a ceiling on gains in stocks. “We are in a rangy market, but the range is wide,” says DayByDay technical analyst Valerie Gastaldy. “This means that in the coming weeks, it may look like a bullish market, but it should not lead to new highs.”

Investors have started to price a peak in the hawkishness of the Federal Reserve’s commentary, while an economic slowdown seems to also be increasingly factored in, judging by the muted reaction to the US entering a technical recession last week.

Volatility measures for both bonds and stocks are falling, but an unusually wide gap persists between the two. Stress in rates remains elevated and while the asset classes have regained a positive correlation, investors should be aware of the risk of a fresh episode of cross-asset turmoil, one way or the other.

To be sure, the market is allowing for plenty of negativity already, even with the latest rally. That’s why some argue that should the clouds troubling investors suddenly clear, upward pressure could arrive with momentum behind it.

“No one is positioned for any good news,” says Thomas Hayes, chairman at Great Hill Capital. He points to cash levels that are at the highest since 9/11, and recession fears at the most pronounced since April 2020 and March 2009.

“The stock market is a discounting mechanism, so while we may be in or will have a recession, the market will bottom far before it is declared,” Hayes says. “Managers will have to chase up and panic buy any further unexpected strength.”

After last Friday’s close, when stocks just completed their best month since November 2020 following a torrid week which saw risk assets explode higher after the US entered a technical recession, after the Fed hiked 75bps, and even after PCE came in hotter than expected, as traders became convinced that a Fed pivot is coming, we published a must-read note from BofA’s Michael Hartnett – Wall Street’s most accurate and bearish analyst – who warned that while a dovish Fed pivot is certainly on the calendar, it’s not coming nearly as fast as the market expects it, and cautioned that there will be at least one more trapdoor in risk assets before Powell is forced to unleash the monetary firehose, most likely some time in early 2023 (Hartnett also detailed the conditions for the real pivot and how to gauge when to sell just ahead of it; our take on his note is is here while his full must read analysts is available to pro subscribers at the usual place). 

And while some disagreed, most notably Morgan Stanley which said that “bad is good ” again…

… others sided with Hartnett, starting with former Treasury Secretary Lawrence Summers had some very harsh words over the weekend suggesting the Fed is engaging in “wishful thinking” in what it will take to tame inflation and that “Jay Powell said things that, to be blunt, were analytically indefensible ….” and that “…there is no conceivable way that a 2.5% interest rate, in an economy inflating like this, is anywhere near neutral.”

He echoed a similar complaint by Bill Ackman who, true to form, took to twitter to explain to the Fed how it is doing a terrible job by not unleashing a depression and instead has led to multiple alleged margin calls on what appears to be another massive treasury and/or Eurodollar short position judging by how often Ackman has slammed Powell for not hiking by… say… .10%.

worse and his job more difficult. The Fed should clarify how it has determined that we are indeed at neutral. Greater clarity would be helpful for all.

— Bill Ackman (@BillAckman) July 29, 2022

But wait, there’s more: the groupthink parade – because really this is just a bunch of axed hedge fund managers and career economists failing to grasp what the market clearly has realized, namely that if you hike enough you will get a recession – expanded over the weekend when even the Fed’s biggest dove, Neel Kashkari, said that the Fed is “committed to doing what’s necessary to bring down demand” in order to reach policy makers’ 2% long-term inflation goal, a target that remains far off.

“We are committed to bringing inflation down and we’re going to do what we need to do,” he told CBS’s “Face the Nation” in an interview on Sunday. “We are a long way away from achieving an economy that is back at 2% inflation, and that’s where we need to get to.”

Inflation that has continued to exceed the Fed’s expectations is “very concerning,” Kashkari said. Faster cost-of-living increases are becoming more broad-based and aren’t limited to just a few categories, and that explains why the Fed is “acting with such urgency to get it under control and bring it back down,” Kashkari, who is a non-voting member this year and thus his opinion is even more irrelevant than usual, said.

Faster inflation is being driven by supply chains disrupted by the war in Ukraine and other factors, Kashkari said, adding that while wages are increasing, they’re not keeping pace with surging goods prices. So for most Americans, “real incomes are going down,” and there’s no “self-fulfilling spiral” of wage-driven inflation yet, he said.

“Families are finding it increasingly hard to make ends meet,” said Kashkari, who served in a key financial stability post at the Treasury Department during the 2008-2009 global crisis. “When they go to the grocery store, when they buy necessities, they’re not able to buy as much because they’re getting a real wage cut.”

Kashkari said that the Fed will do everything it can to avoid a recession, while acknowledging that it doesn’t have a “great record” of being able to do so.

“Whether we are technically in a recession or not doesn’t change my analysis,” Kashkari said. “I’m focused on the inflation data. I’m focused on wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow. So far, the labor market is very, very strong.”

Finally, it was Bill “edible iPads” Dudley, who joined the circus bandwagon this morning, and in a Bloomberg oped, that other former Goldman banker (Goldman is best known for populating central banks with its alumni, whether it is Dudley, Kashkari, or countless others) and NY Fed president echoed what he said in an interview last week, warning that “wishful thinking won’t help The Fed beat inflation.”

Investors have lately become strangely optimistic that the Federal Reserve won’t have to tighten monetary policy much further, bidding up stocks and bonds amid hopes that the Federal Reserve will soon get inflation under control.

This wishful thinking is both unfounded and counterproductive.

The market’s exuberance appears to stem in part from Jerome Powell’s latest news conference, in which the Fed chair observed that growth had slowed, didn’t commit to another 75-basis-point rate increase in September and suggested that monetary tightening might curb excess demand for workers without doing too much harm to those currently employed. This has fueled speculation of a “pivot” to smaller interest-rate increases, with some even arguing that the Fed has done enough already.

Don’t be confident about such an outcome. For one, Powell repeatedly referred to Fed officials’ projections from June, which show the federal funds rate reaching 3.8% in 2023 — more than 50 basis points higher than what financial markets currently expect, and difficult to reconcile with the pivot hypothesis.

As regards the labor market, monetary policy tightening is far too blunt a tool to target demand only for workers not yet employed. It affects all parts of the economy that are sensitive to interest rates, and hence inevitably reaches workers who have jobs, too. The greater the excess demand for labor, the more tightening the Fed must do and the more people will be put out of work. The latest reading from the employment cost index underscores how tight the labor market is: Wages for private sector workers are up 5.7% from a year earlier. Also, Fed officials believe that the unemployment rate consistent with price stability is significantly higher than it was during the last economic expansion. This means more jobs will need to be sacrificed to get inflation under control.

Some argue that the Fed doesn’t need to induce such job losses — that inflation will subside on its own along with the supply disruptions created by the pandemic and the war in Ukraine. But the central bank must contend with the world as it is: If demand exceeds supply, the Fed must act to reduce the former even if the latter is constrained. Beyond that, supply disruptions are far from the whole story. Inflation pressures have broadened, as evidenced by the 6% year-over-year increase in the Cleveland Fed’s median consumer price index, up from 3.8% six months earlier.

All told, the outlook hasn’t changed. Inflation is too high, the labor market is too tight and the Fed must respond — most likely by pushing the economy into an actual recession, as opposed to the two quarters of minor GDP shrinkage that has occurred so far. Wishful thinking in markets only makes the job harder, by loosening financial conditions and requiring more monetary tightening to compensate.

The biggest mistake the Fed can make is to fail to push inflation back down to 2%. Fortunately, Powell recognizes this, even if he understates how difficult the task will be given the economic environment and the Fed’s very late start.

Remember what Dudley said back in April – Investors should pay closer attention to what Powell has said: Financial conditions need to tighten. If this doesn’t happen on its own (which seems unlikely), the Fed will have to shock markets to achieve the desired response.

For now, the financial conditions index has rebounded back to the same levels it was at in April (relatively easy), but as the chart below shows, The Fed has seemingly been willing to only allow a ratcheting down of tightness – presumably because it feels the market and the economy couldn’t take any faster hawkishness…

As Dudley concluded in April: This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower.

* * *

So yes, those short bonds and various secondary (and former) Fed bankers are  making the case that the Fed will (or at least should) keep hiking until inflation finally relents. There are two issues with that:

• First, as today’s PMI report confirmed, inflation has already peaked, and any additional aggressive tightening from this point one will do little to reduce inflation which is already on the way down, but will only make the coming recession far more painful.
• Second, and tied to that, the political outcry against Fed tightening has begun as we noted in  “The Politics Of Growth Are Trumping Inflation“, Sen Elizabeth Warren penned: “If Messrs. Powell and Summers have their way, the resulting recession will be brutal. As in past downturns, Republicans in Congress will press for austerity.” Combating Summers’ argument on the need for higher unemployment to tame inflation, Warren countered “this is the comment of someone who has never worried about where his next paycheck will come from.”

In other words, Democrats have made their political calculus (as a reminder Biden is a superfluous and very old figurehead who doesn’t actually matter when it comes to actual decision-making), and have realized that at this point a recession would poll far worse than inflation.

Expect Biden to eventually figure this out in the next 3-6 months, and Powell to get the official memo, at which point the real dovish pivot can begin. Assuming, of course, Nancy Pelosi doesn’t start World War 3 between China and the US in the next 48 hours.

Authored by Stu Alderoty via RealClearMarkets.com,

Last week, a House Financial Services Subcommittee held an oversight hearing focused on the Securities and Exchange Commission’s (SEC) enforcement division. Despite the norm that ongoing enforcement cases are not discussed at these hearings, Subcommittee Chairman Representative Brad Sherman (D-CA) took it upon himself to put his thumb on the scale of the largest enforcement case in crypto: SEC vs. Ripple. Rep. Sherman’s off-base remarks underscore the urgent need for sensible crypto legislation from Washington.

The case against Ripple, a U.S.-based crypto solutions company, has emerged as the bellwether to get clarity on how to classify and regulate digital assets in the U.S. A brief recap: in 2020, the SEC filed a misguided lawsuit against Ripple, its chairman, and CEO, alleging that XRP was a security. Ripple uses XRP (a cryptocurrency that exists on an open, permissionless, decentralized blockchain ledger) in its product offering to facilitate faster, cheaper, and more transparent cross-border payments.

During his opening and closing remarks at last week’s hearing, Rep. Sherman asked why the SEC had not, in addition to suing Ripple, brought cases against the crypto exchanges that had traded XRP. Rep. Sherman stated: “the fact remains” that “XRP…clearly is a security.”

Here’s the real fact: The filing of a lawsuit determines nothing.

Rep. Sherman, a Harvard trained lawyer, knows that. He knows that the SEC can’t determine XRP to be a security. He knows that no country in the world has determined XRP to be a security. He knows the issue needs to be decided in the court. In short, he knows better.

As a Judge made clear last year: XRP is “no more a security after the SEC filed the enforcement action than it was before it,” because “a determination resolves the question of whether XRP is a security. The enforcement action, by contrast, asks that question. The question is not yet resolved, so a determination has not yet been made. And when it is made, it will be made by the Court.”

It’s still not too late to do something about rising rates.

Interest rates have risen substantially and could rise even further. While market volatility has led to some investors moving to the sidelines, the sidelines may not always be the best choice. Read our report for the latest strategies. Read More

Rep. Sherman’s comments also come fresh on the heels of the SEC recently being called out by another Judge in the Ripple case for its “hypocrisy” and for “adopting its litigation positions to further its desired goal, and not out of a faithful allegiance to the law.”

Rep. Sherman’s behavior highlights the pernicious effect of regulation by enforcement. Rather than provide regulatory clarity through rulemaking, the SEC seeks to bully the market by filing, or threatening to file, enforcement cases. Unproven allegations masquerading as regulation is bad policy that hurts consumers and markets who are whipsawed by the whims of an unchecked regulator. As a result, American innovation — and the jobs created — are fleeing the U.S.

But despite Rep. Sherman’s comments, voices of reason do prevail. At the same hearing, Rep. Tom Emmer (R-MN) criticized the SEC for, “using enforcement to unconstitutionally expand its jurisdiction.”

This is all precisely why Congress needs to fix this mess and provide a comprehensive legislative framework for crypto. Two bipartisan proposals (the Digital Commodity Exchange Act and the Responsible Financial Innovation Act) that seek to define the line between securities and commodities in the digital asset space are a good start. The Wall Street Journal said it best last week when it urged Congress to “exercise its oversight authority over the SEC by demanding that Mr. Gensler halt his high-speed regulatory attack.” Rep. Sherman and his comments do the opposite — with destructive effect.

*  *  *

Stu Alderoty is the General Counsel for Ripple, an enterprise blockchain and crypto solutions company.