The Blowback Begins: Ohio Farmer Vents On Trade War

Via Global Macro Monitor,

Hope you all take the time to read this piece by an Ohio soybean farmer caught up in Trump’s trade wars.

Tariffs hurt the many and help the few.  The “tyranny of the minority,” if you will, and that is before taking into account the casualties of tit-for-tat retaliation.

Let me tell you a riddle.

“I slept with a billionaire because he said he loved me. I expected to make love, but in the morning I realized I was getting screwed. When I went to tell the world, I was offered cash to keep my mouth shut.”

Who am I? No, I’m not a model or someone named Stormy. I’m the American farmer.

In the mid-1980s we were awash with over production in the corn and soybean sectors. Agriculture got busy, boarded planes, trains and automobiles and started building markets around the world, one handshake and one relationship at a time. We used our own funds through our check off dollars and trade associations to build markets in Mexico, Canada, Latin America and the Pacific Rim. And we didn’t stop there. In partnership with the U.S. taxpayers, we built an ethanol industry to ensure another renewable energy source for U.S. consumers. 

–  Christopher Gibbs, Sidney Daily News

Hat Tip:  @Noahpinion

Politics

Big special election in Ohio’s 12th Congressional District on Tuesday.   President Trump was stumping today for the Republican candidate.   The seat has been held by Republicans since 1920, except for an eight-year stretch in the 1930s and a two-year term in 1980.    It’s tight, folks

A Monmouth University poll released this week shows a tight race, with Balderson receiving 44% support to O’Connor’s 43%, with 11% of respondents saying they are undecided.  – CNN

Stunning given the Republican beat the Democrat in the 2016 general for this seat,  66.6 percent to 39.8 percent,  a whopping spread of 36.8 percent.

If the Dems take this one, the Republicans and the president are in deep-deep trouble. Even if it comes anywhere near to as close as the polls suggest, it still spells doom for White House.

We are becoming more confident of our Lavender Wave prediction for the November midterms.

Massive Lavender Wave Coming In November

We believe there will be a massive “lavender wave,” in the November midterms.  Lavender is the color combination of pink and blue.

In a recent poll, the president’s approval rating among men is 54 percent positive and 45 percent negative. Among women, it’s 32 percent positive and 65 percent negative.   There are many more women registered voters than men.

In elections, women are also more likely to vote in higher numbers and have done so for decades.  Women have cast between four and seven million more votes than men in recent elections.

Moreover, the revulsion toward the president among women has not only made them more likely to vote but has turned them into activists.  Women are running for office this year in record numbers.

Recall it was the African-American women who put Doug Jones over the top in Alabama’s special U.S. Senate election against Roy Moore last year.  Exit polls showed that 98 percent of black women supported Jones.

Do the math, folks.  Listen to the water cooler talk, read the cartoons.

The Dems will control the House, and probably Senate come next January.   PredictIt gives the Dems a 68 percent probability of taking back the House but only a 30 percent chance of taking the Senate.   We will take that bet, however, a 3,600 percent compounded annual return if Chuck becomes the next Majority Leader.

A Lavender Wave is not even remotely priced by the markets.

We suspect panic will begin to seep in when everyone returns from the beach in September.  Not a political statement just our observations and inferences based on the data.

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Twitter Suspends Black Conservative For Changing NYT Bigot’s Tweets From “White” To “Jewish” And “Black”

In response to the New York Times’ decision to stand by their most recent hire – open bigot Sarah Jeong, who really hates white people, men (especially white men), and cops – black conservative Candace Owens conducted out a thought exercise we mentioned last week in which we replaced the word “white” with “black” to illustrate Jeong’s animus. 

Here are just a smpling of Jeong’s controversial tweets:

The Times has chosen to stand by Jeong – claiming that she was simply imitating other racists. 

In response to the “no big deal” attitude from the left, Owens simply replaced “white” with Jewish and Black, then mashed Jeong’s statements into one tweet, for which the Twitter police banned her for 12 hours: 

Actually, Twitter only removed (or forced Owens to remove) her tweet about Jewish people, while the one in which she swapped the race from white to black remains as of this writing…  

Meanwhile, conservative pundit Ann Coulter responsded to Jeong’s bigotry with a bit of a history lesson:

Candace responded to her Twitter ban on Sunday: 

Was Candace also suspended for her response to Hillary Clinton’s recent defense of Lebron James, who President Trump recently dissed over Twitter after James criticized Trump for fueling racial divides in the U.S.? 

To which Hillary, or her social media team, replied:  

And Candace Owens replied “This is rich. Your husband locked up more black men than any President in the history of the United States. You view Margaret Sanger (who wanted to exterminate the black race) as your idol and Robert Byrd (former Klansmen) as your mentor and dear friend.” : 

Perhaps someday Twitter will let us in on what consitutes racism and harassment – since the goal posts seem to be all over the place depending on who said what. 

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All FAANG’d Up

Via RealInvestmentAdvice.com,

Bulls Make A Charge For The Highs

Last week, we discussed how the market managed to clear the “Maginot Line” which brings January highs into focus. The chart below is the updated analysis from last week.

Given this is a “weekly” chart, it takes much more time for signals to register. The advance over the last few weeks has taken the market back into overbought territory and was a point made last week:

“The market can most assuredly get even more overbought from current levels, but does suggest that upside is becoming more limited from current levels. However, with the weekly ‘buy signal’ triggered this past week, we must give the bulls some room to run.”

Currently, the “bulls” remain clearly in charge of the market…for now. While it seems as if much of the “tariff talk” has been priced into stocks, what likely hasn’t as of yet is rising evidence of weakening economic data (ISM, employment, etc.), weakening consumer demand, and the impact of higher rates.

While on an intermediate-term basis these macro issues will matter, it is primarily just sentiment that matters in the short-term. From that perspective, the market retested the previous breakout above the March highs last week (the Maginot line) which keeps Pathway #1 intact. It also suggests that next week will likely see a test of the January highs.

With moving averages rising, this shifts Pathway #2a and #2b further out into the August and September time frames. The potential for a correction back to support before a second attempt at all-time highs would align with normal seasonal weakness heading into the Fall. 

Currently, there is a very low risk of a deeper correction (Pathway #3). However, it is a possibility that should not be ignored at this juncture. With the administration gearing up for further tariffs against China, and China retaliating in kind, at a time when the Fed is already more aggressively tightening monetary policy, it would be remiss to ignore the risk of “something going wrong.” 

It would also be remiss to not remind you that despite the “bullish short-term view,” the long-term outlook remains decidedly bearish. With valuations elevated, price extended, and deviations near historic records, the potential for a more severe correction in prices is an absolute certainty.

The issue is that these cycles can remain both fundamentally and technically overvalued for longer than logic would dictate particularly when there are artificial influences at play. However, the message is clear for those that choose to listen. This is why it is crucially important to have a discipline and strategy in place which will manage the exposure to risk when things change in the market.

Weekly Buy Signal Is In, But Don’t Jump

In the 401k Plan Manager at the bottom of this newsletter each week, I publish the model that drives our portfolio allocations over time.

There are two important concepts to understand about this model.

  • Risk knows no age: Risk doesn’t care how old you are. It is often said that if you are 20, you should take on a lot of portfolio risk. However, if that risk is taken at the top of a market cycle, the damage to the long-term financial goals can be disastrous. We believe that our allocation to risk has nothing to do with our age, and everything to do with the potential for the loss of capital. Therefore, our allocation model is broken into two parts.
    • Allocation model is based upon current valuation levels.
      • If valuations were 10-12x earnings the target allocation levels would be primarily weighted towards equity (i.e. 80% Stocks / 20% Bonds)
      • As valuations rise behind historical extremes, target equity levels are reduced. (i.e. 60/40, 50/50, etc.)
    • The EQUITY portion of the allocation is also adjusted based on current market risk. Earlier this year, the equity risk portion of the allocation model was reduced from 100% to 75% due to a triggering of a confirmed “sell” signal. There are 4-primary indicators to the model:
      • 1st signal – short-term warning signal. Only an alert to pay attention to portfolio risk. 
      • 2nd signal – reduce equity by 25%.
      • 3rd signal – (Moving average cross-over) reduce equity by another 25%.
      • 4th signal – (Trend change) – reduce equity by another 25% and short the market.

We will be posting a live version of our indicators at RIAPro.net (currently in beta) as shown below.

The 4-signals above also run in reverse. So, when a signal reverses itself, equity risk is increased in the model as is the case this week.

With that signal in place, we must now increase our portfolio allocation model to 100% of target.

However, it is important to note these signals are based on “weekly” data and are intermediate-term in nature. Therefore, by the time these longer-term indicators are triggered, the very short-term conditions of the market are generally either very overbought, or oversold.

So, Do I Buy Or Not?

At this juncture, most individuals tend to let their emotions get the better of them and they make critical errors with their portfolios. Emotional buying and selling almost always leads you into doing exactly the opposite of what you should do.

Currently, the market has registered a “buy signal,” which means we need to be following our checklist to ensure we are making sound investment decisions:

  • What is the allocation model going to look like between asset classes?
  • How will those choices affect the volatility of my portfolio relative to the market?
  • What is the inherent risk of being wrong with my choices?
  • What is my exit point to sell as the market goes up?
  • Where is my exit point to sell if the market goes down?
  • What specific investments will I use to fill each piece of my allocation model?
  • How does each of those investments affect the portfolio as a whole as well as each other?
  • Where is my greatest and least amount of exposure in my portfolio?
  • Have I properly hedged my risk in my portfolio in case of a catastrophic event?

If you can’t answer the majority of these questions – you should not be putting your money in the market.

These are the questions that we ask ourselves every day with our portfolio allocation structures and you should be doing the same. This is basic portfolio management. Investing without understanding the risk and implications is like driving with your eyes closed. You may be fine for a while but you are going to get seriously hurt somewhere along the way.

There is NO RULE which states you have to jump into the market with both feet today. This is not a competition or game that you are trying to beat. Who cares if your neighbor made 1% more than you last year. Comparison is the one thing that will lead you to take far more risk in your portfolio than you realize. While you will love the portfolio as it rises with the market; you will rue the day when the market declines.

Being a “contrarian” investor, and going against the grain of the mainstream media, feels like an abomination of nature. However, being a successful investor requires a strict diet of discipline and patience combined with proper planning and execution. Emotions have no place within your investment program and need to be checked at the door.

Unfortunately, being emotionless about your money is a very difficult thing for most investors to accomplish. As humans, we tend to extrapolate the success or failure within our portfolios as success and failure of ourselves as individuals. This is patently wrong. As investors, we will lose more often than we would like – the difference is limiting the losses and maximizing the winnings. This explains why there are so few really successful investors in the world.

With this in mind, it doesn’t mean that you can’t do well as an investor. It just means that you must pay attention to the “risks” inherent in the market and act accordingly.

• Yes, the market is on a “buy” signal. 
• Yes, we need to add exposure as shown in the 401k plan manager below. 
• No, it doesn’t mean that you need to act immediately

However, it does mean that we need to pay close attention to developments over the next couple of weeks to be sure the “intersection” is clear and that we can proceed to the next traffic light safely. Hopefully, we can catch it “green” – if not, we will obey the signal, stop, and wait for our turn once again.

While the model is being increased back to 100% of target, we will selectively add equity exposure during short-term corrective actions in the market.

As I noted last week:

“With our portfolios nearly fully allocated, there are not a lot of actions we need to take currently as the markets continue to trend higher for now. We will continue to monitor our exposure and hedge risk accordingly, but with the weekly “buy signal” registered, we are keeping our hedges limited and are widening our stops just a bit.

As noted above, a short-term correction is needed before adding further equity exposure to portfolios. That correction likely started on Friday, and I will not be surprised to see it continue into next week. A retest of 2800 is likely at this point, which would keep Pathway #1 intact. However, a violation of that level will likely trigger a short-term sell signal, which could push the market back towards previous support at 2740. 

There is a lot of support forming at 2740, which should be supportive of the market over the next couple of months. A violation of that level suggests something has likely broken and more protective actions should be taken.”

Until that happens, we will give the markets the benefit of the doubt…for now. 

All FAANG’ed Up

Doug Kass had an interesting point on Apple’s surge to $1 Trillion in market cap.

A consensus has formed among economists that the trend toward corporate concentration – in terms of the size of companies and their grasp on profits – is real and may be long-lasting.

“The number of papers that are being written on this from week to week is remarkable,” said David Autor, a Massachusetts Institute of Technology economics professor who has studied the phenomenon…”Apple and Google combined now provide the software for 99 percent of all smartphones. Facebook and Google take 59 cents of every dollar spent on online advertising in the United States. Amazon exerts utter dominance over online shopping and is getting bigger, fast, in areas like streaming of music and videos.” –New York Times, Apple’s $1 Trillion Milestone Reflects Rise of Powerful Megacompanies

With much justification, a small group of stocks, referred to as FAANG, has dominated the U.S. stock market and U.S. economy.

Nearly half of this year’s gains in the S&P 500 Index have come from the five component stocks of FAANG (Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet — aka Google (GOOGL) ).

Lance here: 

A couple of week’s ago I addressed this market capitalization issue, to wit:

“The current environment has the look and feel of a late-stage market cycle. This is particularly the case when you have 20-stocks making up more of the overall S&P 500 index than the bottom 400 combined.”

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”– Bob Farrell’s Rule #7: 

Back to Doug:

Indeed, FAANG stocks have fueled much of the near-decade-long bull market since March 2009.

The rise of FAANG has contributed and influenced our domestic economy, in a not-so-good way. Facebook, Amazon, Apple, Netflix and Google’s unfettered growth has manifested in declining levels of unionization and contributed to the disruption of numerous industries, thus influencing the general trend of weak wage growth and impacting the rise in income inequality.

As the technology of FAANG has rapidly eclipsed the influence of regulatory supervision and an antiquated antitrust legislation, their sales growth and market dominance have gone nearly untouched by the hand of government.

The business media has rejoiced in Apple reaching a $1-trillion market cap and, not surprisingly, has embarked on a trivial, simplistic and superficial discourse, questioning how much further Apple can rise, which will be the next $1-trillion company, and so forth.

Rather, one should consider the consequences of the concentrative issues relating to FAANG and consider what happened to the U.S. and global economies when our banking industry grew exponentially by leveraging itself into oblivion, proving that it was not too big to fail in 2008-2009.

“A year ago, the big tech companies were basically untouchable; today, they seem not to be.”
–Luigi Zingales, University of Chicago

To me, the existential risk to FAANG is that their growth is dulled by the above realities and the U.S. government takes a more aggressive position toward FAANG’s domination. After all, in an age of populism seen both on the political left and the right, assaults by legislators and government regulatory bodies seem likely to intensify.
As well, should the current phase of protectionism continue and the possibility of trade wars intensify even further, it could result in the disruptors being disrupted.

After all, nearly 19% of Apple’s sales are derived from China.

By contrast, the existential risk to our economy is that their growth is allowed to continue at a helter-skelter pace, with some of the downside factors mentioned in this morning’s missive multiplying should the growth snowball be permitted to roll further down the economic hill.

*******

Doug’s point is interesting as it dovetails into an article that David Robertson, CFA wrote for RIA this past week wherein he noted:

“Such competition moves the tradeoffs of centralization vs. decentralization to the geopolitical stage: ‘The AI competition may be better viewed as part of a broader struggle between a decentralised democratic model and a digital authoritarian system.’

So are technology companies breaking bad? That would probably be an overstatement, but it is very fair to say that many of the elements crucial to harness the full potential technological innovation are underrepresented in today’s environment. Knowledge of technologies is insufficient, governance is slow and weak, and public engagement is low. This creates a weak position from which to wrest power from companies with strong economic incentives. This is important for investors. Unless things change, there is a good chance that not only will the great potential of technological innovation fail to be realized, but also that such innovations will continue to be exploited right up until things break.”

The risk of concentration into the few stocks poses an enormous risk to investors when, not if, something inevitably goes wrong.

As we saw just recently with plunges in $FB and $NFLX, given the massive levels of leverage currently built into the system a concentrated sell-off in the FAANG stocks could lead to a rather disastrous unwinding for investors.

While such an event is widely dismissed as impossible, it is important to remember it was deemed to be that way previously. This tweet from David Rosenberg sums it up succinctly.

As I noted last week, the underlying economic environment, and the associated structural deformations pose a substantial risk to investors longer-term.

“While fighting trade wars, pushing tax cuts and increasing government spending may provide short-term boosts to the economy by pulling forward future consumption – they do not address the issues which are detracting from longer-term growth.’

  • Debt
  • Spending Hikes
  • Demographics
  • Surging health care costs
  • Structural employment shifts
  • Technological innovations
  • Globalization
  • Financialization

While Doug’s, David’s and Rosie’s points are valid, these are issues that will take time to develop. As such, the ongoing performance of FAANG stocks will continue to lure unwitting investors into the trap which will eventually lead to their demise.

But such is the nature of markets historically.

Just be careful you don’t get F.U.B.A.R.ed. (FAANG’ed Up Beyond All Recognition)

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Armed Bystander Takes Down Gunman At Florida Children’s Event

An armed bystander licensed to carry a firearm shot a gunman who opened fire at a back-to-school event at a Titusville park, reports local ABC affiliate WFTV9.

The shooting occurred at Isaac Campbell Park on South Street shortly after 5:20 p.m. when the shooter, whom police have not identified, returned to the park after a fistfight and began firing. 

A bystander licensed to a carry a firearm then shot the shooter, who was flown to a nearby hospital with life-threatening injuries, police said. –WFTV9

(full video here, shooting at 7:50)

The bystander who shot the gunman has been fully cooperative with the investigation, according to local police. “We are extremely grateful that nobody else was injured in this incident,” said Deputy Chief Todd Hutchinson. “This suspect opened fire at a crowded public park, this could have been so much worse.”

A flyer posted on Facebook and Instagram said a back to school event called “Peace in the City” was going on at the park when the shooting happened. –WFTV9

While we expect 2nd Amendment advocates will point to this incident as a “good guy with a gun” taking down a “bad guy with a gun,” gun control activists are likely to pretend it never happened – or that local police would have intervened.

After all, when seconds count, the police are just minutes away! 

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Schiff: “The Next Crisis Is Not Going To Look At All Like 2008”

Peter Schiff is an economist who served as an advisor to Ron Paul in 2008 and even made a run for Senate on his own at one point. He’s well-known in the “Austrian” as well as the libertarian economic community, but is perhaps best known for his belief that our next coming crisis is going to be “an order of magnitude larger than the crisis in 2008”, only this one, the Federal Reserve is not going to be able to print their way out of, Schiff predicts in his most recent interview.

“What the Fed is worried about is a repeat of the 2008 financial crisis. What they don’t realize is the next crisis is not going to look like the 2008 crisis,” Schiff said.

He makes the why the dollar going up in 2008 helped the Fed bail everyone out, and why it’s going to be impossible for the Fed to do the same thing when the dollar collapses during the next recession. Schiff also explains that a loss of confidence in the dollar as the world’s reserve currency could see interest rates move much higher, resulting in the U.S. defaulting on its debt. 

Despite getting the 2008 housing crisis right, Schiff’s appearances in the mainstream financial media have declined precipitously due to his bearish outlook. As an alternative, he has created a substantial voice for himself on his YouTube channel, which boasts hundreds of thousands of subscribers. 

On Saturday, August 4, Peter Schiff appeared on the Quoth the Raven podcast to talk about a multitude of topics, including:

  • Why the mainstream media doesn’t have him on anymore, despite predicting the 2008 financial crisis production dead-on
  • Why the government should have let more banks fail in 2008
  • Why he believes that a socialist will be elected in 2020 and why a libertarian may actually have a chance in 2024
  • Why he believes the price of gold will be appreciating drastically in the years to come
  • Why people are going to want to own commodities and emerging markets and get out of dollar denominated assets in the United States
  • Why the Fed “stress tests” are rigged
  • Why macroeconomic data shouldn’t be relied upon
  • How inflation will hit when newly printed money finally exits the capital markets

On the podcast, Schiff also notes how wrong the media and economists were in 2008, an accusation he himself has been the target of in recent years:

“It’s a total double standard because it shows you their way of thinking. If you look at all of these experts that were completely wrong now that we’re 10 years from the financial crisis…by 2007, the bubble had burst…even after it was so completely obvious. I was predicting it. They didn’t figure it out until everything imploded…”

“I was going on television in mid 2008 saying ‘we’re in recession’ and they were saying ‘you’re crazy, there’s no recession in sight…'”

You can listen to the full podcast here:

In the podcast, Schiff also talks how Keynesian and Austrian economic theory differ, how inflation has an effect on the middle class, the politics of Trump’s economic policy, and the recent volatility in tech stocks and tons more.

Peter’s YouTube channel can be found here, meanwhile for those looking for some of the best alternative podcasts around, check out QTR’s work at the following link.

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CA Bullet-Microstamping Law Upheld By 9th Circuit, Even Though Technology Doesn’t Exist

A California “microstamping” law that requires new semi-automatic handguns automatically imprint bullet casings with identifying information has been upheld by the 9th circuit court of appeals in a 2:1 split decision – despite the fact that the technology doesn’t exist, reports ABC News.

The microstamping law – the first of its kind in the nation signed in 2007 by then-governor Arnold Schwarzenegger, took effect in 2013. It requires that brand new handguns sold in California imprint the gun’s make, model and serial number in “two or more places” on each bullet casing from a spent round. 

The result of the new law was Smith & Wesson, Ruger and other manufacturers opting to pull out of California.

Gun rights advocates have slammed the law, as the technology doesn’t exist to stamp bullet casings in two places as the law is written, and even if it did, criminals could replace or file down the firing pin and any other mechanism to “microstamp.” 

The law became effective as soon as the California Department of Justice certified that the technology used to create the imprint was available. When this certification occurred in 2013, the State clarified that the certification confirmed only “the lack of any patent restrictions on the imprinting technology, not the availability of the technology itself.”  In layman’s terms, the state was saying that nothing was stopping someone from developing the technology, so it was “available,” even though it wasn’t. –NRA-ILA

As a result, compliance with the law’s “dual placement microstamping” requirement was both practically and legally “impossible,” according to court documents from a lawsuit brought by the National Shooting Sports Foundation (NSSF) and the Sporting Arms and Ammunition Manufacturers Institute (SAAMI). In support of their claim, writes the NRA Institute for Legislative Action, the plaintiffs cited an existing provision of California law, Civil Code section 3531, which states “[t]he law never requires impossibilities.” 

California gun rights advocates say the law effectively bans the sale of new semi-automatic handguns in the state. 

And what did the 9th circuit say to that? 

Too bad – as residents can still buy used handguns that don’t carry the yet-to-be invented microstamping technology, as well as any guns on a pre-approved roster – thus, the inability to buy a new semiautomatic handgun that’s not on the roster doesn’t infringe on the 2nd Amendment right to self-defense. 

Writing for the majority, Judge M. Margaret McKeown said the inability to buy particular guns did not infringe the 2nd Amendment right to self-defense in the home.

“Indeed, all of the plaintiffs admit that they are able to buy an operable handgun suitable for self-defense — just not the exact gun they want,” she said.

McKeown, joined by Judge J. Clifford Wallace, also rejected the argument that the stamping technology was impossible to implement. –ABC News

Calguns foundation executive director Brandon Combs said that the 9th circuit used a less rigorous judicial standard in order to arrive at its “policy preferences.” 

“Really what the 9th Circuit is saying and has said in other cases basically is as long as a person that is law abiding has access to one handgun inside of their home, then that’s it,” he said. “That’s the extent of their right. We think that’s quite wrong.“

Dissenting from the majority was Judge Jay Bybee, who cited conflicting evidence over whether the microstamping technology was even technologically feasible – and that if the state adopted an impossible requirement that no gun manufacturer can satisfy, it would not help the state solve handgun crimes and would illegally restrict gun purchases. 

As Breitbart‘s resident Second Amendment columnist AWR Hawkins detailed in 2015, Maryland canceled a similar “ballistic fingerprinting” program after 15 years and $5 million dumped into the program resulted in no crimes solved. 

The law did not call for “microstamping” like California’s – rather it relied on unique metallurgical “fingerprints” left behind by a gun’s firing pin. Each new gun sold in the state would need to be fired one time, and the resulting bullet casing sent to the state’s police headquarters. Unfortunately, while the forensic technology to match a bullet casing with a gun exists – the computerized system designed to sort and matched images of casings never worked – so the state canceled the program. 

Of course, just wait until DNA identification is implemented:

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Stock Market Manias Of The Past Vs ‘The Echo Bubble’

Authored by Pater Tenebrarum via Acting-Man.com,

The Big Picture

The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.

 

Who’s who in the zoo in 2018

The above combination is consistent with a market close to a major peak – although one must always keep in mind that divergences can become even more pronounced – as was for instance demonstrated on occasion of the technology sector blow-off in late 1999 – 2000.

Along similar lines, extremes in valuations can persist for a very long time as well and reach previously unimaginable levels. The Nikkei of the late 1980s is a pertinent example for this. Incidentally, the current stock buyback craze is highly reminiscent of the 1980s Japanese financial engineering method known as keiretsu or zaibatsu, as it invites the very same rationalizations.

We recall vividly that it was argued in the 1980s that despite their obscene overvaluation, Japanese stocks could “never decline” because Japanese companies would prop up each other’s stocks. Today we often read or hear that overvalued US stocks cannot possibly decline because companies will keep propping up their own stocks with buybacks.

Of course this propping up of stock prices occurs amid a rather concerning deterioration in median corporate balance sheet strength, as corporate debt has exploded into the blue yonder (just as it did in Japan in the late 1980s). The fact that an unprecedented number of companies is a single notch downgrade away from a junk rating should give sleepless nights to fixed income and stock market investors alike –  as should the oncoming “wall of maturities”.


A giant wall of junk bond maturities is looming in the not to distant future. Unless investors remain in a mood to refinance all comers, this threatens to provide us with a spot of “interesting times”. Something tells us that “QT” could turn into a bit of a party pooper as the “Great Wall” approaches.

It should also be mentioned that past stock market peaks as a rule coincided with record highs in buybacks. This indicates that record highs in buybacks are mainly a contrarian indicator rather than a datum providing comfort at extreme points.

Of course, what actually represents an “extreme point” can only ever be known with certainty in hindsight, as extremes tend to shift over time – particularly in a fiat money system in which the supply of money and credit can be expanded willy-nilly. What can be stated with certainty is only whether the markets are entering what we would call dangerous territory.

Stock buybacks are zooming to unprecedented heights

From an anecdotal evidence perspective the continued existence of curmudgeons like us who are aware of the above and are pointing out that this is a dangerously overstretched market may actually be a good reason to believe it will become even more overstretched. When the bubble pops one of these days, we may superficially look like the proverbial stopped clock that finally showed the right time – note though that our views on the big picture and our short term tactics are two different cups of tea.

After all, we even trade cryptocurrencies, which are well beyond fundamental analysis – this is to say, we don’t believe it is possible to assign a “proper” valuation to them. We don’t know if a Bitcoin is worth nothing (that seems unlikely though) or a million dollars. What we do know is that it is a market that is extremely suitable for short term trading based on technical analysis.

In terms of long term investment strategies we prefer methods that eschew market timing altogether. We mainly rely on a specially adapted version of the permanent portfolio (which is extensively discussed in Austrian School for Investors, a book we modestly contributed to and warmly recommend, mainly for the contributions of the other authors).

Moreover, the “big picture” can only be judged once the cycle has fully run its course.

Diverging Indexes and Major Stock Market Tops

In view of the growing intra-market divergences mentioned above, we decided to create a few comparison charts which show three major market indexes on occasion of major stock market peaks of the past three decades, plus one additional indicator, namely the spread between 2- and 10-year US treasury yields as a proxy for the yield curve.

The indexes are the Dow Jones Industrial Average (DJIA – not really an index, but a price-weighted average), the NDX (a proxy for big cap technology stocks) and the NYSE Composite (NYA – a proxy for the broad market). We have chosen three major turning points, namely the 1987, 2000 and 2007 peaks, which we compare to today’s situation.

The charts follow in chronological order, starting with 1987.

The 1987 top: the DJIA and the NYA topped at the same time and also and made a secondary lower high concurrently, but the NDX diverged from them by making a higher high on occasion of the secondary peak – this is par for the course at major market peaks. Interestingly the crash of 1987 did not presage an imminent recession. A recession occurred much later (in 1990), but by that time the market had already regained the losses it had suffered in the crash. Note that the yield curve did not invert prior to the crash – in fact, the low of the 2-10 spread was at a relatively high 75 basis points – the spread did explode to 140 basis points as the crash unfolded, but it provided no actionable advance warning. So much for the theory that “nothing bad can happen before the yield curve inverts”.

The flame-out of the tech mania in early 2000. Once again there was a divergence between the peaks in DJIA and NDX, but it was extremely large on this occasion. After its initial 36% crash in April of 2000 the NDX proceeded to lose a rather disconcerting 83% of its value over the next two years. At the peak, the NYA diverged from both DJIA and NDX, but in this case by being the last index to top out. The reason for this was in our opinion that value stocks had already declined for more than two years by the time the mania peaked, and there was a big rotation from growth to value when the Nasdaq crash began, as value stocks were genuinely cheap at the time. The yield curve had inverted rather dramatically, but it gave no advance warning – rather, the lowest point of the 2-10 spread – a negative -52 basis points – coincided perfectly with the low of the initial crash wave in the NDX.

The 2007 market peak was a bit trickier, as there was actually no outright divergence between the three indexes. However, at the secondary peak in early October the NDX outperformed the other indexes substantially, as the “flight to fantasy” (i.e., into the most overvalued market sectors) we always see at major peaks was once again in full swing. This time the yield curve did provide an advance warning: the 2-10 spread had inverted and bottomed in late 2006 already, and was expanding noticeably by the time equities made their top. We believe this happened because the recession in the housing sector had started in 2006 already, around the time the Bank of Japan cut its balance sheet by 25% almost overnight as it reversed its previous “QE” policy. The bond markets evidently sensed that this would eventually lead to broad-based recession which would force the Fed to abandon and reverse its baby-step tightening policy.

And here is finally today’s situation (read here why we call it the “echo bubble” – explanation at the end of the article). There is once again a major divergence between DJIA/NYA and the NDX, which is outperforming the former two quite noticeably since the late January peak and has streaked to new highs. The deterioration in market internals is highly reminiscent of that seen on occasion of previous market tops, as an ever smaller number of big cap stocks  – mostly in the tech sector – is driving the advance. The so-called FANG stocks (FB, AMZN, NFLX, GOOGL) currently trade at around 9 times revenues, the highest ever. Including AAPL they now represent around 11% of the S&P 500 index – which recently reached an interim high while only 3% of its components actually made a new high. The 2-10 spread has recently made a low at a positive 24.7 basis points and has since climbed to 32 basis points. Similar to 1987 and 2000 we do not expect a major advance warning from this indicator, especially in view of the fact that a ZIRP regime has been in place for several years. Japan serves as a historical example: the last 5 recessions and bear markets in Japan all started without a preceding yield curve inversion. The last time a major market peak in Japan was preceded by an inverted yield curve was in 1989. How will the 2018 divergence between the indexes play out? We cannot be certain, but we do believe it represents a major warning sign. Keep in mind that it is not necessary for a recession to be imminent: a very overvalued and over-loved market with weak internals can crater at any time, it does not have to presage a recession. As an aside, there is a major difference between the year 2000 peak and the current situation: while growth has vastly outperformed value in both eras, this time value stocks are definitely not cheap. Rather, the “everything bubble” has pushed the valuations of almost all sectors to extremely lofty levels. There may well be rotation, but it probably won’t be as pronounced as it was after the top of the tech mania in 2000. An equal opportunity massacre seems far more likely this time around.

Measures of Giddiness

We mentioned extremes in sentiment and weak internals above and wanted to show a few pertinent examples. The charts below illustrate why there is good reason to be concerned about the divergences that have developed in recent months.

This chart mirrors margin debt – it shows “available cash”, which has recently reached a record negative USD 331 billion. Obviously, conviction is stronger than ever (note the positioning of the “excessive optimism” line).

Purchases of calls by small traders (newly opened positions) have exploded to new highs –  and the recent peak actually diverged from the SPX (though not from the NDX, which may be more relevant in this case). If there is a “wall of worry”, this group of traders does not see it.

The RYDEX leveraged bull-bear asset ratio has made a new high at 24 in late January and has put in peaks above the 20 level two more times since then.

The number of buy and sell recommendations on AMZN (we found this chart also via sentimentrader). The ratio is currently 48:1, which in a sense is an improvement, as there were zero sell recommendations previously. Look at where the ratio stood in late 2002 when AMZN could be bought for $5 (in words: half a sawbuck). They sure hated it in late 2006, when sell recommendations actually exceeded buy recommendations – it traded at $25 at the time. Well, they really love it at $1,740 (current level $1,830 – still getting the same amount of love).

Cash is trash: the ratio of US equity market capitalization to money market assets has recently left the solar system and has now reached the Oort cloud. It certainly does not look as if anyone is worried about the possibility of a stock market downturn.

We could continue along this line ad nauseam, but you probably get the drift by now. Lastly, here is an update of a chart we frequently show because it has been quite useful in the past, the SPX new high-new low percentage index. It remains extremely weak and is only a small step away from giving a new sell signal – which is quite astonishing considering the strength in the index:

New high-new low percentage index – we have left our annotations from the last update on the chart, which point out that the market failed to reach “oversold” status in the February decline. The rebound has been very weak and is a strong hint that another decline is in the offing (compare to the situation prior to the sell-offs in August 2015 and January-February 2016).

Conclusion

The conclusion from all this is obviously that risk is currently very high. Of course risk also spells opportunity, and anyone who has to have exposure to the stock market should at least consider hedging it while hedges can still be had for a song (which invariably is the case just before things go awry).

We leave you with one last chart that shows a fundamental datum – year-on-year growth of US federal tax revenues. Note that this shows the situation until the end of Q1 2018, this is to say prior to the tax cut taking effect. It flies into the face of the “strong economy” narrative and indicates to us that much of the economy’s strength was probably based on government spending.

A more comprehensive list was provided by Northman Trader from whom we have pinched the chart of buybacks shown above – as he puts it:

So if anyone tells you the economy is expanding show them this thread. It’s not. GDP growth in Q2 was inventory build, tariff front loading and debt financed consumer spend. Key drivers of the economy are not expanding. What is expanding is massive deficit spending and buybacks.

Negative growth in federal tax receipts is normally associated with the onset of recessions rather than economic booms. This datum is clearly at odds with the “strong economic expansion” narrative.

Addendum: as we have found out in the meantime, withholding tax reductions resulting from the tax cut started in mid February already, which has definitely contributed to the decline. Nevertheless, growth in tax receipts had already decreased to just 0.55% in Q4 2017 and has been in a downtrend since peaking at 21.23% in Q2 2013, so the tax cut has merely exacerbated a trend that was already well underway.

 

Modern-day hi-tech bear hunt…

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“They Tried To Assassinate Me Today” Venezuela’s Maduro Says As US Denies Involvement

Was it a gas cylinder explosion? An assassination plot of US-allied groups? Or possibly the unheard of “National Movement of Soldiers in T-shirts” that are now claiming responsibility?

And where are the remnants or debris parts to any drones that may have been exploded, or possibly even live iPhone footage of drones overhead shot by any one of what appears to have been tens of thousands attending the event?

It seems the more details that come out surrounding the apparent drone assassination attempt of Venezuelan President Nicolas Maduro on Saturday afternoon, the stranger and more ambiguous it gets in terms of exactly what happened and who is responsible. 

For starters on Sunday morning US National Security Adviser John Bolton addressed charges of potential American involvement head on, telling Fox News Sunday host Chris Wallace, “I can say unequivocally there was no U.S. government involvement in this at all”.

This followed a speech by Maduro in what was his first formal statement since the incident wherein the controversial left-wing Venezuelan president described, “They tried to assassinate me today,” while blaming the attack on right-wing factions specifically connected to Columbia and Florida.

He claimed that “several of those intellectually responsible and the financiers of this attack live in the United States, in the state of Florida,” and called on U.S. President Donald Trump to “fight these terrorist groups”.

Maduro further related that one drone exploded in front him, with seconds later another blast detonating to his right. “That drone was coming for me but there was a shield of love,” Maduro said.

Indeed a live feed showing Maduro speaking at a large army commemoration event in the capital of Caracas was cut off mid-speech as explosions were heard, and body guards immediately shielded the president with bullet proof coverings, after which soldiers can be seen running in disarray before the transmission ends.

Neither President Maduro nor his wife or government ministers sharing the stage with them were reported injured, and they express what appears to be genuine shock and fear when the blasts went off. 

Photographs depicted at least one possibly seriously wounded soldier with blood running down his face, and Venezuelan state sources reported that a total of seven National Guard soldiers were injured.

John Bolton’s denial of US involvement came in response to Maduro’s prior accusation, and unverifiable claims of suspects in Venezuelan state custody according to Reuters:

Maduro said “everything points” to a right-wing plot that initial investigation suggested was linked to Colombia and the U.S. state of Florida, where many Venezuelan exiles live. Several perpetrators were caught, he said, without elaborating.

In response to these accusations, Bolton elaborated during his Fox interview, saying, “If the government of Venezuela has hard information that they want to present to us that would show a potential violation of U.S. criminal law, we’ll take a serious look at it, but in the meantime I think what we really should focus on is the corruption and oppression in the Maduro regime in Venezuela.”

President Donald Trump was promptly briefed on the incident Saturday evening prior to a rally in Ohio, according to White House statements. 

And in what could constitute among the more bizarre twists in an already incredibly strange story, an obscure and relatively recently established “resistance” group calling itself the “National Movement of Soldiers in T-shirts” (Soldados de Franela) claimed responsibility for the targeted assassination attempt in a series of social media posts. The group claimed it flew two drones toward the president, which it says were shot down by snipers. 

“We demonstrated that they are vulnerable. We didn’t have success today, but it’s just a question of time,” wrote the group. 

Among the alternate narratives that quickly emerged moments after the attack was that a gas explosion occurred in a nearby residential building. Video footage and photographs showed a nearby apartment building on fire, which Venezuelan and other sources said was caused by one of the drones crashing into it. 

Location of of one of the drone crash sites, according to Venezuelan authorities. Image source: Getty

According to a local citizen interviewed by Reuters, there were two distinct blasts. Yet thus far there hasn’t been any cell phone video or photographic evidence to emerge depicting what the Venezuelan information ministry described as “drones loaded with explosives” that targeted the downtown area. 

During a Saturday emergency briefing on state television, Information Minister Jorge Rodriguez said “We have proof that this was an assassination attempt,” and underscored of the plotters, “They’ve failed.”

Meanwhile, responding official Venezuelan statements suggesting Columbian involvement, the Colombian Foreign Relations Ministry said the charge is “absurd” and without basis: “We’re used to the Venezuelan leader constantly accusing Colombia for any sort of situation,” the ministry said in a late Saturday night statement.

Addressing doubts and contrary claims about the assassination attempt that are currently rampant, a director at the polling firm Delphos, Felix Seijas, told Bloomberg: “It’s a shame that at this hour, public opinion is doubting the official version, be it true or not.” And he concluded, “It’s the outcome of years of control over the free media, censorship and multiple false government alerts on assassination attempts.”

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Edward Snowden: 5 Years In Russia & Still Relevant As Ever

Authored by Seraphim Hanisch via TheDuran.com,

TASS reported that August 1 was the five year anniversary of Edward Snowden’s being granted temporary asylum in the Russian Federation.

This happened after his release of an enormous trove of information showing clandestine and illegal practices being carried out by the US intelligence agencies to gather information on just about anyone in the world, for any – or no – reason at all.

Edward Snowden, 35, is a computer security expert. In 2005-2008, he worked at the University of Maryland’s Center for Advanced Study of Language sponsored by the National Security Agency (NSA) and at the global communications division at CIA headquarters in Langley, Virginia. In 2007, Snowden was stationed with diplomatic cover at the US mission to the United Nations in Geneva, Switzerland. In 2009, he resigned from the CIA to join the Dell company that sent him to Hawaii to work for the NSA’s information-sharing office. He was particularly employed with the Booz Allen Hamilton consulting firm.

In June 2013, Snowden leaked classified information to journalists Glenn Greenwald and Laura Poitras, which revealed global surveillance programs run by US and British intelligence agencies. He explained the move by saying that he wanted to tell the world the truth because he believed such large-scale surveillance on innocent citizens was unacceptable and the public needed to know about it.

The Guardian and The Washington Post published the first documents concerning the US intelligence agencies’ spying on Internet users on June 6, 2013. According to the documents, major phone companies, including Verizon, AT&T and Sprint Nextel, handed records of their customers’ phone conversations over to the NSA and the Federal Bureau of Investigation (FBI), who also had direct access to the servers of Microsoft, Yahoo, Google, Facebook, Skype, YouTube, Paltalk, AOL and Apple. In addition, Snowden’s revelations showed that a secret program named PRISM was aimed at collecting audio and video recordings,photos, emails and information about users’ connections to various websites.

The next portion of revelations, which was published by the leading newspapers such as The Guardian, Brazil’s O Globo, Italy’s L’Espresso, Germany’s Der Spiegel and Suddeutsche Zeitung, concerned the US spying on politicians. In particular, it became known that the NSA and Great Britain’s Government Communications Headquarters intercepted the phone calls that foreign politicians and officials made during the G20 summit in London in 2009. British intelligence agencies particularly tried to intercept then Russian President Dmitry Medvedev’s phone calls. US intelligence monitored the phone calls of 35 world leaders, including German Chancellor Angela Merkel.

According to the disclosed information, the NSA regularly gathered intelligence at the New York and Washington offices of the European Union’s mission. The agency also achieved access to the United Nations’ internal video conferences and considers the Vienna headquarters of the International Atomic Energy Agency (IAEA) as one of its major targets for spying.

The leaks also uncovered details about the Blarney and Rampart-T secret surveillance programs. Blarney, which started in 1978, is used to collect information related to counter-terrorism, foreign diplomats and governments, as well as economic and military targets. Rampart-T has been used since 1991 to spy on foreign leaders. The program is focused on 20 countries, including Russia and China.

Snowden also let the world know that Germany’s Federal Intelligence Service and Federal Office for the Protection of the Constitution used the NSA’s XKeyScore secret computer system to spy on Internet users, monitoring their web activities. In addition, the NSA and Great Britain’s Government Communications Headquarters developed methods that allowed them to hack almost all the encryption systems currently used on the Internet. Besides, the leaked documents said that the NSA had secretly installed special software on about 100,000 computers around the globe that provided access to them and made cyber attacks easier.In particular, the NSA used a secret technology that made it possible to hack computers not connected to the Internet.

Portions of the information Snowden handed over to Greenwald and Poitras continue to be published on The Intercept website. According to edwardsnowden.com – a website commissioned by the Courage foundation (dedicated to building support for Snowden), a total of 2,176 documents from the archive have been published so far.

The NSA and the Pentagon claim that Snowden stole about 1.7 mln classified documents concerning the activities of US intelligence services and US military operations. He is charged with theft of government property, unauthorized communication of national defense information and willful communication of classified communications intelligence information to an unauthorized person. He is facing up to ten years in prison on each charge.

As can be seen, Mr. Snowden’s work is of extreme importance now in the connected Internet age.

But how is his life in Russia now?

According to Sputnik News, his life goes on. Reports say that he is continuing to learn the Russian language and to travel about the country:

Anatoly Kucherena, Edward Snowden’s lawyer, has revealed some details of the renowned whistleblower’s life to Sputnik. According to him, Snowden has found a job, is actively traveling around Russia and is continuing to learn the language.

Kucherena added that Snowden receives visits from his girlfriend, Lindsey Mills, and his parents. When asked about the whistleblower’s favorite place in Russia, his lawyer said that he likes St Petersburg “a lot.”

“He is doing alright: his girlfriend visits him, he has a good job and he’s continuing to study Russian. His parents visit him occasionally. [They] have no problems with visas. At least they have never complained about having any trouble,” the lawyer said.

After Snowden released classified NSA documents, he fled first to Hong Kong, then, on June 23, 2013, arrived in Moscow from Hong Kong. The whistleblower remained in the transit zone of Sheremetyevo Airport until he was granted temporary asylum in Russia, which was later prolonged to 2020.

As The Guardian wrote this week, Snowden’s disclosures are of historic importance and it is important that they remain accessible in order to generate insights far into the future. Today, Courage maintains the most comprehensive search engine for the published Snowden documents, the Snowden Doc Search, which we developed in partnership with Transparency Toolkit. Courage also maintains a complete chronological list of Snowden reporting, which will be continue to be updated for as long as documents from the Snowden archive continue to find their way into the public domain.

Some facts and figures from the Snowden archive

2176 documents have been published to date

41 publications and broadcasters around the world have produced original reporting based on newly released documents.

The number of documents published, by year:

2013 – 51

2014 – 264

2015 – 222

2016 – 720

2017 – 568

2018 – 351 so far

The vast majority of published documents (some 1985) come from the NSA, but there are also – 136 from GCHQ, 13 from Canada’s CSE, 5 from New Zealand’s GCSB and a couple from Australia’s ASD. Last month, a document from Japan’s secretive DFS, became the first from that agency ever to be published.

If you take the Anglophone Five Eyes countries out of the mix, the countries most often mentioned in the Snowden documents are Iraq (which is referred to in 299 separate documents), Afghanistan (157), China (129), Germany (126) and Pakistan (116).

The most frequently referenced codename by quite some way is XKeyScore, which goes to show how important this internal search tool for “nearly everything” is for NSA. Access to XKeyScore is an important resource for NSA’s international partners and reporting has shown that it has been made available to analysts in Germany, Sweden and Japan as well as the Five Eyes countries.

This just scratches the surface of what you can do with the Snowden Document Search and Courage’s other Snowden resources. 

*  *  *

“I don’t want to live in a society that does these sort of things…”

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Elon Musk: “Turns Out Even Hitler Was Shorting Tesla”

Few tweets are as memorable as Elon Musk’s taunt to shorts from April 3, 2017, when Tesla stock soared above $300 for the first time, a level it has found to be a (mostly) rock solid support level in the ensuing 16 months.

And while Elon Musk has certainly outdone himself in the past year, launching a barrage of angry tweets aimed not only at shorts, but also targeting reporters, hecklers, whistleblowers, and anyone else who challenged his grand (cash-burning) vision which even included Thai cave rescue pedophiles heroes, following the latest earnings call which sent TSLA stock higher by 15% amid a furious short squeeze that cost shorts some $1.7 billion in paper losses  (which however has barely resulted in any short covering) Musk took his latest victory lap, mocking and teasing shorts, only this time instead of being the weatherman, Musk reused an old and familiar meme: the Hitler “Downfall” excerpt, and this time the Fuhrer faces a bitter end as a result of the massive Tesla shorts squeeze.

To Elon’s credit, the video is quite amusing, and may well be in the Top 5 “Downfall” spoofs.

Then again, with Tesla’s cash burn still gigantic, net debt surging, net working capital drained, CapEx bizarrely slashed even as the company plans to build a factory in China and Europe, conflicting reports over Model 3 production and demand, Tesla revenue unexpectedly recasted, and so on, we doubt the shorts – and Hitler – are ready to throw in the towel just yet and let Musk have the last laugh.

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