Author: admin

Submitted by Christopher Westley via The Mises Institute,

Now that the presidential election is finally over, can we talk about something that actually matters?

I’m referring of course to Tobleronegate, meaning the uproar surrounding the Swiss-based (but US-owned) chocolate company, Mondolez International. The company has widened the gaps between the segments of its iconic chocolate bar, reducing its total volume by some 10 percent. Although the reaction has something of an Old Coke-New Coke air to it, one can easily see it as a sign of the inflationary times, an effect of worldwide money creation coordinated by the leading central banks, with Toblerone being just one of many victims.

The economics of the decision shouldn’t surprise an actual student of economics. Since inflation is always and everywhere a monetary phenomenon, and since the world’s central banks have been pumping new money into the global economy at unprecedented rates for several years, we should expect an upward pressure on prices. In a Facebook post, Toblerone explained that it was forced into changing its product in response to “higher cost of numerous ingredients,” adding that

…we had to make a decision between changing the shape of the bar, and raising the price. We chose to change the shape to keep the product affordable for our customers, and it enables us to keep offering a great value product.

Statements such as this cause Toblerone to become, unwittingly, a case study for how firms in competitive markets respond when monetary inflation raises their costs of production. When that happens, firms are less able to pass the cost on to consumers in the form of higher prices because if they do, they face a strong likelihood of losing market share and revenues. Instead, these firms cut back in terms of volume, size, and portions. 

We see this all the time. Have you been to a restaurant lately where the menu prices haven’t seemed to change but the portions of food on your plate has? Or opened a bag of chips that hasn’t fallen in size while the volume of chips inside has? Or consumed a product of lower quality than you remembered in less inflationary times because its producer was obligated to change ingredients to break even?

The fact is, Toblerone can’t raise its prices willy-nilly due to the many substitutes available to consumers. Critics claiming otherwise ignore this common side effect of inflation in competitive industries, a phenomenon that especially has applied to candy markets in recent years. 

That said, the public’s response to the new Toblerone ranges from the funny to the bizarre. One person photoshopped a KitKat bar from four sections to two, with a large gap in-between. Others are showing that the new Toblerone gaps can be used for makeshift filing systems suitable for toast or electronics. There is even talk that Toblerone will have to change its intellectual property strategy given that its iconic shape has been changed so drastically. IP lawyers see gold in “them thar gaps.”

Then there’s a Brexit angle base, from what I can see, on the argument that (1) some people said bad would come from Brexit, (2) Brexit happened, followed by, (3) Toblerone’s new shape, which obviously then means, (4) Brexit ruined the candy bar. Or something like that. In response, Toblerone claims the change was planned well before Brexit.

We can all agree Toblerone underestimated consumer responses to its decision to reduce the volume in one of its signature candies and this, in itself, is not a big deal. One of the reasons why the free market system isn’t perfect is because the firms that comprise it often make mistakes. Just the same, what makes this system superior to the alternatives is the ability of firms to identify and act on those mistakes, whether by themselves or their competitors. New Coke didn’t last long. GM no longer produces Hummers. Meanwhile, my local post office plugs away, unchanged from what I remember it being 25 years ago. 

Toblerone may announce it made a mistake and go back to the previous shaped candy, albeit at a higher price. Or it might revert to the previous shaped candy but at a smaller volume. Perhaps it will look for inferior ingredients, making it the Swiss chocolate equivalent of corn syrup soda. Yuck.

But wouldn’t it be great if, instead, Toblerone turned this incident into a teaching moment for its devoted customers? If it used its social media channels to remind them of the virtues of hard money and the costs of fiat money? If it helped Toblerone aficionados see the relationship between gaps in their candy to mainstream monetary fads that help bring them about?

It was rare but not uncommon for firms to make such arguments during the inflationary 1970s. It would be even more satisfying than good Swiss chocolate to see it again.

via http://ift.tt/2grRf1u Tyler Durden

RBC's head of US cross-asset strategy, Charlie McElligott wants to "bang you over the head in order to expose the tectonic shift being experienced in markets on the narrative / regime shift."

After a succinct and clarifying commentary:

We’re at a phase in this UST / developed sovereign bond trade where previously acceptable conditioning (‘buy dips’; ‘get long-er duration because it just keeps working’; ‘never-ending bond inflows will always pause selloffs’ etc) are all being reset in real-time, and this behavioral shift is painful.

 

In the micro, on top of the oil explosion yesterday (taking inflation expectations with it), we saw further pile-on from the incoming administration which idiosyncratically weighed further on the long-end.  Trump’s Treasury Secretary nominee Steven Mnuchin’s “mention” of the possibility of issuing ultra-long bonds (50Y, 100Y) to extend the maturity of the debt certainly isn’t helping the already overwhelmed and under-water duration trade.  RBC Rates Strategist Mike Cloherty with some quality tactical thoughts: "While we think that 50s or 100s would be a uniquely bad idea for the Treasury, we'd assign 50-50 odds on it happening. If we get ultras, we would expect the volatility of that ultra-long to spill down into the 30yr sector. Higher 30yr vol would make extending from 10s to 30s look like a worse trade from a Sharpe ratio perspective. The potential for issuance changes is another thing that makes the recent flattening of 10s30s seem like it has gone too far."

 

Haha, I’d say so – look at the USTs curves today, with 2s30s +6bps, 2s10s +5bps.

 

So add:

 

1) larger and longer (maturity) sovereign borrowing needs to the list of bond paper-cuts too.  In conjunction with the ‘already in motion’…

2) inflation impulse (energy ‘base effect’ and wage growth in US);

3) global growth ‘pick-up’ (G10 economic surprise index at 3 yr highs, global manufacturing PMI index at 2.5 yr highs);

4) pro-growth domestic US policies from the new administration (tax cuts, deregulation THEN infrastructure in that order);

5) new administration ‘more hawkish’ tilt;

6) general fiscal stimulus shift and data escape velocity driving an accelerated normalization period;

7) the global CB / political shift from monetary policy to fiscal policy (flatter to steeper); and finally

8) outright lazy legacy / crowded positioning (driven by the ‘old CB regime’) which has to be unwound…

 

And these factors are now forming a ‘fact pattern’ which is helping crystalize the concept of a “paradigm shift” towards a “new normal” markets regime / construct.

 

The fact that it is ‘getting sticky’ with regards to price-action is obviously ‘spooking’ many in the market who simply are not positioned for said ‘new world order.’  Unfortunately for them, as the aforementioned ‘old conditioning’ ceases to work, the cynicism has come at the expense of portfolio duress.

 

We have operated in a world since the crisis which saw the narrative set at ‘deflation,’ ‘secular stagnation,’ ZIRP / NIRP and QEternity, which collectively had conspired to drive rates lower / flatter in perpetuity…or so it was assumed.  The lazy positioning we’ve discussed for a year now with regards to ‘long duration,’ or strategy constructs based upon leveraging ‘low volatility’ assets like bonds (when built during a 30-year bond bull market!) are too being reset.  “Slow growth / slow-flation was the reality—how could you own cyclicals / value / high beta equities?” was the muscle-memory.  Retail investors and their wealth management folks lapped-it-up: ‘up’your fixed-income / bond allocation, and lever that up with ‘low vol’ equities—INCOME AT ALL COSTS! 

 

Obviously things went peak insanity this year off the back of the failed NIRP experiment, forcing “the world’s real $”–asset liability managers—to pile into duration for ‘funding survival.’  The whole picture peaked in July with the ‘yield grab’ at its max-bizarro: equities for yield / income, fixed income for capital appreciation.

 

That is why this is a move that will take longer than weeks to ‘wash out,’ as the slower-moving mega allocators within the global investment community has to position for reflation and growth.  It just happened too violently for them to have moved yet.

 

This shift in rates—and knock-ons into inflation (under-owned), credit (loans and HY over IG), FX (EM issues but there are carry opportunities) and equities (rotation to cyclicality) has room to run.

McElligott unleashes his chartfest exposing the way the world has changed in the last 3 weeks…

G10 ECONOMIC DATA SURPRISE INDEX AT 3 YEAR HIGHS:

 
G10 INFLATION SURPRISE INDEX AT 4+ YEAR HIGHS:
 

 
REFLATING–GLOBAL MANUFACTURING PMI INDEX AND U.S. 10Y BREAKEVEN YIELDS: This was already in motion before Trump…it’s now just accelerating on top due to the fiscal stim shift.  
 

 
ATLANTA FED WAGE GROWTH TRACKER = JAMMIN’:
 

 
RANGE ON THE BOND BULL MARKET (BACK TO ’86) IS NEARING A ‘TEST’: 10Y UST yield (quarterly) bumping up at the extremes.
 

 
EURODOLLAR FUTS 6-10 CURVE BREAKOUT HOLDS:
 

 
UST 10Y YIELD TREND LINE GOES ‘BYE-BYE’:
 

 
UST 5Y BREAKS FOUR YEAR RESISTANCE:
 

 
LONG DURATION GOODNIGHT: From +31% YTD at start of July to now down on the year.
 

 
GOLD AND DURATION / ‘REAL RATES’: Gold suffering under the weight of higher real rates / the duration beat-down, which simply makes it an unattractive asset to hold in a world where yield has suddenly reappeared.  
 

 
YUAN DEVALUATION AND THE DESTRUCTION OF THE 30Y UST GO HAND-IN-HAND: But signs of a decoupling after PBoC potential interventions prior to touching the 7.00 level.
 

 
DOW JONES INDUSTRIAL AVERAGE AND EMERGING MARKET BOND ETF:
 

 
U.S. EQUITIES THEMES FOR NOVEMBER % RETURN—LOL: Value > Growth, Cyclicals > Defensives, High Beta > Low Beta.  REFLATION.  
 

 
EQUITY FACTOR MKT NEUTRAL PERFORMANCE SHOWS ENORMOUS DISPERSION AND ACTIVE MANAGEMENT OPPORTUNITIES ABOUND: Make Active Management Great Again!

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Emboldened by his “victory” with Carrier Corp, which agreed to keep 1,100 workers in the US instead of outsourcing them to Mexico in exchange for $7 million in tax incentives over 10 years, as part of his victory tour in Indiana, Donald Trump on Thursday warned that U.S. companies will face “consequences” for outsourcing jobs overseas.

“Companies are not going to leave the United States any more without consequences. Not going to happen,” the President-elect said on a visit to a Carrier Corp plant in Indianapolis cited by Reuters.

U.S. President-Elect Donald Trump speaks at event at Carrier HVAC plant in
Indianapolis, Indiana.

Trump, did not elaborate just what the consequences would be but during the election campaign he frequently threatened U.S. firms that his administration would put a 35% import tariff on goods made by American manufacturers who moved jobs offshore. As part of his “Make America Great Again” campaign, Trump has made keeping jobs in the US one of the main aspirations of his election campaign and frequently slammed Carrier for planning to move production to Mexico as he appealed to blue-collar voters in the Midwest.

Trump said his negotiation with Carrier would serve as a model for how he would approach other U.S. businesses that are tempted to move jobs overseas to save money – which likely means providing further tax concessions in exchange for keeping workers in the US.

In laying out the “carrot”, Trump also pledged to create a healthy environment for business via lower taxes and fewer regulation: “I just want to let all of the other companies know that we’re going to do great things for business. There’s no reason for them to leave any more,” Trump said.

Should the carrot fail however, there is a “stick” and Trump warned that If that approach did not work, there would be penalties.

U.S. President-elect Donald Trump and Vice-President Elect Mike Pence tour the
Carrier factory in Indianapolis

The Carrier deal marked a quick, and high profile win for Trump, who has spent most of his time since the Nov. 8 election in New York building his team ahead of the handover of power from President Barack Obama.

Arriving early in the afternoon, Trump toured the plant in Indianapolis and shook hands with workers on an assembly line. Some workers yelled out “Thank you Mr. Trump” and “Thanks Donald” as he greeted them. Carrier confirmed that Indiana agreed to give the company $7 million in tax incentives. A source briefed on the matter said the tax incentives are over 10 years and the company has agreed to invest $16 million in the state, which is run by Governor Mike Pence, Trump’s vice president-elect.

Donald Trump greets a worker as he tours a Carrier factory with Greg Hayes,
CEO of United Technologies in Indianapolis, Indiana, U.S., December 1, 2016.

Trump’s victory however was not without blemishes: Carrier still plans to move 600 jobs from the plant to Mexico, the Wall Street Journal said. Reuters reported earlier this week Carrier also still intends to close a factory in Huntington, Indiana, that employs 700 people making controls for heating, cooling and refrigeration and move the jobs to Mexico by 2018.

* * *

And while Trump was enjoying the first stop of his victory parade, he was slammed by Bernie Sanders who, in a WaPo op-ed, warned that the Carrier deal is incomplete and leaves the incoming Trump administration open to threats from companies, echoing a concern we noted last night.

Sanders’ concerns were actually quite valid, by highlighting the shift in the negotiating calculus between corporations and the new administration. In the very worst case, Sanders is right that companies will now feel empowered – with a vivid case study – to demand concessions in order to keep jobs in the US.

“Trump has endangered the jobs of workers who were previously safe in the United States. Why? Because he has signaled to every corporation in America that they can threaten to offshore jobs in exchange for business-friendly tax benefits and incentives,” Sanders wrote in a Washington Post opinion piece on Thursday. He is not wrong. Sanders also noted that Trump had originally said he would save 2,100 jobs that Carrier planned to move to Mexico.

“Let’s be clear: It is not good enough to save some of these jobs,” Sanders said although it was unclear what his alternative – if any – would be to keep jobs in the US.

Sanders wasn’t the only one to slam the Trump deal. Moments ago, Reuters reported that according to a senior Mexican state official, Trump’s intervention to stop jobs at a plant in Indiana going to Mexico “is typical of what happens in countries that Americans call “banana” republics.”

Trump’s deal with Carrier created an “uncomfortable” situation for the company, and went beyond politicians’ remit, Fernando Turner, economy minister for Nuevo Leon, said in an interview. “It’s not our job. It’s up to companies to take their own decisions, not politicians; that’s what’s done in Latin American countries that they call banana (republics) in the United States,” he said, laughing.

“It’s not something that was done up until now in the United States. But anyway, things change.”

Turner also said that Mexico had not been a winner from NAFTA. The trade deal had both failed to lift Mexican economic growth and had cost the country millions of jobs, he argued. In that case, we can only add, since both the US and Mexico are against NAFTA it should probably be scrapped immediately.

“(Trump) is sending a message to (U.S.) workers, to unions that they don’t need to change, that everything is fine, that Mexico is the problem. But the problem is not Mexico,” Turner added. “They’re barking up the wrong tree.” 

Still, Turner said Trump was “intelligent” and his ambition to grow the U.S. economy would benefit Mexico if it came off. “Trade between Mexico and the United States did not begin with NAFTA,” he said.

* * *

While it remains to be seen how Trump will deal with Mexico – whose ambassador to the US Carlos Manuel Sada Solana told the Arizona Republic that “we have said time and again Mexico is not paying for the wall” – Trump may have to to resolve other domestic issues first: despite Trump’s deal, employers elsewhere in Indiana are laying many more thousands of workers because of foreign competition. If Trump is indeed serious about them facing “consequences”, we may soon find out just what these will be.

via http://ift.tt/2fQWmUW Tyler Durden

Newsweek’s political editor, Matthew Cooper, looked as though he’d had a rough month when he appeared on the Tucker Carlson show last night to discuss the “Madam President” debacle.  While the printing and distribution of the erroneous “commemorative edition” magazine was embarrassing enough, Cooper also revealed that no one at Newsweek wrote the Hillary article or even bothered to proofread it before it was shipped off to stores around the country. 

Frankly, it’s difficult to discern between fact and fiction with this story, but, given the quality of the writing, we suspect Cooper had little choice but to distance himself and his team completely from the magazine.  Here is a small excerpt in which Trump’s supporters are again referred to as “deplorables” who “called to repeal the 19th amendment.”  Oddly, we covered the election pretty thoroughly and don’t recall anyone calling for a repeal of the 19th amendment…guess we totally missed that one.

“…as the tone of the election grew darker and more bizarre by the day, President-Elect Hillary Clinton ‘went high’ when her opponent went even lower.  No stranger to trudging through the mire of misogyny in her career as first lady, senator, and secretary of state, President-Elect Clinton continued to push for an issues-based campaign even as a handful of Trump’s most deplorable supporters, seeing the wide margins Clinton held among female voters, called to repeal the 19th amendment.  On election day, Americans across the country roundly rejected the kind of fear and hate-based conservatism peddled by Donald Trump and elected the first woman in U.S. history to the presidency.  The culminating election of a career in politics spanning 3 decades and arguably more experience than any other incoming president, 2016’s was not an easy race to watch, comment on or be a part of–but when the dust cleared it revealed a priceless moment in American history.  The highest glass ceiling in the Western World had [been shattered]…”

Of course, in distancing himself from the magazine Cooper noted that the “writing in this is, shall we say, was not up to the editorial standards of Newsweek.”

So, as Zero Hedge and others come under attack from the mainstream media for reporting “fake news”, we now have a concrete example of an establishment “news” source admitting that it printed and distributed fake news under it’s corporate brand that it neither wrote nor even bothered to read, yet no one, other than Fox News, says a word?

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While America avoided having another Redneck (or in honor of Bill Clinton should we say ‘HillBilly’ ) in the White House, there’s big Redneck karma for America as millions of Rednecks went out and voted for Trump, many of whom never voted before in their lives, many of whom can’t read.  Certainly this didn’t alone get Trump elected, but it didn’t hurt.  And they sho feel praud!

With a Trump president and a Republican President second, the government will generally cut back on entitlement programs.  Rednecks shouldn’t be worried about this, it’s just time to get creative!  Study this guide, you’ll need it to invest if you don’t meet the ECP requirements to qualify for any decent managed investments.  As we explain in our book Splitting Pennies – in the case of Forex, rules have made investing in Forex strategies that never lose and other good strategies, nearly impossible for the average investor (try, $5 Million minimums).

1) FREE TROLLING (Not “Freefallin”)

Troll for freebies, giveaways, free product samples, free books, free ebooks, free money!  There’s a number of places to start, such as a site like this that lists places you can simply get stuff for free:  http://ift.tt/2grNFV0  

Try as a strategy – ask vendors for free stuff!  Just a small author experience, was in the Asian Market and the checkout guy (looked like the owner, but hard to tell in such places) gave me a free “Chinese Tomato.”  Yes, there is such a thing as a FREE LUNCH – especially in Forex trading.

2) Join contests & sweepstakes

Often when you buy products, they will enter your chance to win $2,000 or something.  But if you read the fine print, there’s no purchase necessary!  There’s literally thousands of contests, se

If you ARE going to do this, beware of scams, spam, and other junk associated with it.  Here’s a good article as a starting point.

3) Free products for product reviews

This takes some time to get setup but when it works, it works good!  You’ll need an Amazon account (free) and you will need some activity.  Many new sellers will give away their products simply for a fair and honest review.  You can contact Amazon sellers if they will do this or have a program.  What they will want in return, is your fair and honest review, and you must state at the end of the review, that you received this product in exchange for the review.  (read the entire review below, see the part about ‘I received this fabulous portfolio free for testing and review.)  You can find such products on Amazon.com just look for any product with many reviews, look the 5 star reviews.

In case you didn’t catch them, checkout part 2 and part 1 of our series, Redneck Investin’ – for those who can’t afford a 401k, we explain what is ‘401 keg.’

Get your free-on, at http://ift.tt/2grNFV0

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Submitted by Lance Roberts via RealInvestmentAdvice.com,

Bull Market Exuberance

As I addressed on Tuesday, the exuberance in the markets following the election, is getting just a bit overdone. To wit:

“Such an outlook is certainly encouraging, but there is a long way to go between President-elect taking office, drafting bills and getting them passed. There is even a further period of time before any actions actually passed by the Trump administration actually create perceivable effects within the broader economy. In the meantime, there are many concerns, from a technical perspective, that must be recognized within the current market environment.”

The level of “complacency” in the market has simply gotten to an extreme that rarely lasts long. The chart below is the comparison of the S&P 500 to the Volatility Index. As you will note, when the momentum of the VIX has reached current levels, the market has generally stalled out, as we are witnessing now, followed by a more corrective action as volatility increases.”

More to this point, the chart below shows the S&P 500 as compared to the level of volatility as represented by the 6-month average of the Volatility Index (VIX). I have provided three different bands showing levels of investor sentiment as it relates to volatility. Not surprisingly, as markets ping new highs, volatility is headed towards new lows.

This rise in complacency is also correspondent to the level of investor optimism following the recent election. The change in expectations is actually quite a phenomenon considering the rapid change in the narrative from “Trump The Terrible” to “Trump The Great.”

This post-election surge in investor optimism is shown below. The first chart is the bull/bear ratio of both professional investors (as represented by the INVI Index) and individuals (from AAII). Currently, the level of bullishness has surged to levels more normally associated with intermediate term tops in the market.

The net bullishness (bulls minus bears) of both individual and professional investors has likewise surged to levels which again have been more historically representative to intermediate term tops in the market.

As I have noted on Tuesday, with the markets overly extended, bullish and complacent, the risk of a correction has risen markedly. 

As shown in the chart above, the market is currently pushing a 3-standard deviation of the 50-dma which it has not done at any point over the last 3-years. Such extensions can, of course, be resolved by the markets either trending sideways or declining. In either event, the current levels of complacency, bullish optimism and price extension suggest there is little upside in the markets currently.

As I discussed previously, the most likely outcome is some corrective action in the first couple of weeks of December as hedge and mutual funds pay out redemptions and distributions. Such a correction will offer a better opportunity to re-evaluate equity related exposure and adjust accordingly.

Importantly, there is little currently to suggest the markets can withstand higher rates, inflation, US Dollar or tighter monetary policy for long. The impact to exports, corporate earnings, consumption and debt will impact economic growth negatively which is why I am still hedging equity risk exposure in portfolios. Maybe “Trumponomics” will work as planned and economic cycles can be repealed? Maybe stocks have indeed reached a “permanently high plateau?”

However, given the current dynamics of the market from a historical perspective, valuations, debt-to-income ratios, etc., there is little to suggest such long-term bullish outcomes are likely. For now, I suggest remaining patient as the long-term benefits of excessive risk taking are skewed to the downside.

But then again, as John Maynard Keynes once quipped:

“Nothing is more suicidal than a rational investment policy in an irrational world.” 

We do live in interesting times.

 

Small Caps Surge On “Trumpectations”

On Monday, I listened to an interesting discussion on why investors should jump into “small cap” stocks now as the “Trump Train” was leaving the station. The premise is lower tax rates, and stimulus spending via “infrastructure,” is going to provide an ongoing boost to smaller capitalization stocks.

Of course, small capitalization companies have already experienced a tremendous move since the election chasing this exact premise. However, there may be a problem.

Small capitalization companies, as opposed to the larger brethren, are impacted more quickly by changes in the economic and monetary environment. For companies that do business internationally, changes to the dollar create a bigger impact earnings. Changes in interest rates more quickly impact decisions on borrowing decisions by changing the costs of capital.

The first chart shows the small-cap index relative to the 6-month rate of change of interest rates. The dashed black lines show that when there has been a rapid rise in rates, there has been short to intermediate negative outcomes for small-capitalization stocks.

The same can be seen with the 6-month rate of change in the US Dollar. As the dollar rises, the cost of exports to foreign buyers rise as well.

Currently, small-caps are getting the double whammy of rising rates and stocks simultaneously as shown below. If the media is correct, and the dollar and rates continue to strengthen under “Trumponomics,” the combined impact could effectively derail much of the benefit of the expected policies.

There are also threats that stem from enacting large tax cuts and boosting public spending in an economy already nearing full employment, higher interest rates, and a stronger dollar. As noted by Anatole Kaletsky via Project Syndicate:

“The impact on financial markets will be disruptive, regardless of whether the Fed aggressively tightens monetary policy to pre-empt rising prices or lets the economy ‘run hot’ for a year or two, allowing inflation to accelerate.

 

With the US economy growing faster than expected and long-term interest rates rising, excessive strengthening of the dollar is a third major risk. Even though the dollar is already overvalued, it could move into a self-reinforcing upward spiral, as it did in the early 1980s and late 1990s, owing to dollar debts accumulated in emerging markets by governments and companies tempted by near-zero interest rates.“

Just remember, as has always been the case, rapid changes in monetary variables have inevitability led to an unexpected and exogenous shock that have surprised the markets. This time will likely be no different.

 

Forecasts For 6% GDP Somewhat Unrealistic

Just recently, Barron’s penned an interview with Jeff Gundlach discussing the recent election of President-elect Trump and his views on interest rates going forward. To wit:

“Trump’s pro-business agenda is inherently ‘unfriendly’ to bonds, as it could to lead to stronger economic growth and renewed inflation. Gundlach expects President-elect Trump to ‘amp up the deficit’ to pay for infrastructure projects and other programs. That could produce an inflation rate of 3% and nominal growth of 4% to 6% in gross domestic product. ‘If nominal GDP pushes toward 4%, 5%, or even 6%, there is no way you are going to get bond yields to stay below 2%,’ he says.”

First, you can’t blame Gundlach for “talking his book” because if he is right, he will lose a LOT of money over the next 5-years as assets flow out of his bond funds and into other asset classes. However, I really don’t think he has much to worry about.

While everyone is certainly exuberant about the hopes for an economic boom under President Trump, let’s step back from the ledge for a moment and look at some realities.

As I have shown previously, there is a very high correlation between economic growth, inflation, interest rates and wages.

The problem for Trump, and for Gundlach’s outlook, is that we no longer reside in the 80’s where a large group of “baby boomers” were entering the workforce and driving a massive wave of innovation and productivity changes.  Today, we are on the wrong side of the demographic trends combined with falling productivity and labor force growth.

As Dr. Ed Yardeni noted:

“In any event, the horses may already be out of the barn. Only 8.5% of payroll employment is now attributable to manufacturing, down from 10.3% 10 years ago, 14.3% 20 years ago, and 17.5% 30 years ago. Bringing factory jobs back to the US may bring them back to automated factories loaded with robots. Even Chinese factories are using more robots.”

And from Harvard Business Review:

“Slow productivity growth is the main cause of slow economic growth, and slow economic growth makes it all but impossible for everyone’s boat to rise. No wonder angry citizens want dramatic change. But while voters may see the problem in a political establishment that is out of touch, the populist politicians who are challenging that establishment are unlikely to fare better.

 

In the short term, they may be able to medicate the economy with a big tax cut or a dose of deficit spending. When the effects of that treatment wear off, though, the effects of slow productivity growth will linger.”

But beyond the productivity problem is simply debt.

Debt deters consumer spending as the debt must be serviced. Give consumers more money via a tax-cut, as we have seen previously, and it will not necessarily show up in the economy but rather in debt service. The pay down of debt would be good provided interest rates do not rise. However, if Gundlach is right, debt service will explode consuming whatever increases to income may come from tax reductions and infrastructure spending. 

The same goes for the deficit. At $20 Trillion in debt, which will increase by $5 Trillion over the next 4 years at current run rates, an increase in rates towards 6% will send service costs skyrocketing. The deficit will expand sharply towards $2 Trillion completely sapping the economic recovery story.

As opposed to the 1980’s when deficit spending could be used to increase economic growth, with a current $650 billion deficit, the input of an infrastructure spending program will be negligible at best and massively deflationary at worst.

If the Fed increases interest rates, along with the impacts of higher treasury rates, such will choke off the flow of credit available and makes businesses less likely to spend. While it may reign in inflation, it also decreases economic output. This typically leads to a recession.

As stated, the net positive impact to economic growth in the short-run from a Trump plan would be negligible.

“In short, introducing large stimulus plans during cycle peaks — roughly where we are now — doesn’t increase private spending as much as during downturns. So the 4% GDP growth promised by Trump is ‘not going to happen’ even with the plan.”

Just some things I am thinking about.

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In one of the day’s more puzzling developments, the Mexican peso tumbled on news that the head of the Mexican central bank, Augusten Carstens, who several years ago competed against Christine Lagarde for the top IMF post, announced he would unexpectedly stand down from his post next July. The term of the 58-year-old Carstens, who headed the central bank since 2010, was due to conclude at the end of 2021, which makes today’s announcement particularly surprising.

Carstens, a former Mexican finance minister respected by international investors, will leave to take the top
job at the Bank for International Settlements in October for a
five-year term. He is known as a savvy political operator who rose from being the central bank’s chief economist in the 1990s to hold senior posts in the finance ministry. As head of the central bank, he presided over Mexico’s recovery from the global financial crisis and helped keep inflation low in a country that had suffered a string of economic mishaps in previous years.

The peso, which has plunged in recent weeks on by fears surrounding the Trump presidency, tumbled more than 1% on the news, hitting its lowest since mid-November, however it has since recovered modestly.

“It was shocking,” Ernesto Revilla, an economist at Banamex, said of Carstens’ departure cited by Reuters. “There were rumors of this, but no one was expecting it to happen so soon, especially with the new Trump scenario.” Revilla added that “Agustin has been a pillar of economic policy in Mexico.” He added that the peso suffered on Thursday because “there is no clear successor at the central bank … There is no one on the top of peoples’ minds of who could take his place,” he added.

So why the sudden announcement? Among the theories emerging is that Carstens has had enough dealing with the unpredicabilities in the political climate, especially since the Trump election, and wanted out. During the presidential campaign, Carstens had warned that Trump’s election could hit Mexico like a hurricane; he also conducted a stress test for local banks to prepare for the “contingency” of a Trump presidency.

Following Trump’s victory, Carstens followed the crowd in changing his tune, and suggested the next U.S. government’s impact could be less severe. However, today’s announcement confirms he was less than sanguine about a Trump presidency, and the impact it would have on the Mexican currency and economy, and opted out.

TO be sure, he is not along. Most members of the central bank’s board are concerned that uncertainty about new economic policies under Trump could further hammer the peso, according to minutes from the central bank’s board last meeting released earlier on Thursday. “Going forward, the majority agreed it’s possible that the … recovery won’t be sustainable due to the aforementioned uncertainty surrounding the economic policies of the new administration of the U.S. government,” the minutes said.

Among other things, Trump has threatened to rip up a free trade deal with Mexico during the campaign and any such move could hit Mexico’s economy, which sends around 80% of its exports to the United States.

Joining other nations eager to prop up their currency against the soaring dollar (and failing), Mexico’s central bank raised its main interest rate by 50 basis points to 5.25 percent on Nov. 17, the fourth hike this year to support the peso, which hit a record low after Trump’s win. It is down more than 20 percent this year. More hikes will be needed.  

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…you’re out!

 

Source: Townhall.com

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