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In what the Telegraph dubs a victory for Eurosceptics, the conservative newspaper reported overnight that Britain’s new Prime Minister, Theresa May, will not hold a parliamentary vote on Brexit before formally triggering Britain’s withdrawal from the European Union. “Her decision will come as a blow to Remain campaigners, who had been hoping to use Parliament to delay or halt Brexit entirely.”

According to the Telegraph, May will not offer opponents the chance to stall the withdrawal and has consulted lawyers who say she has the power to invoke the exit without a parliamentary vote. A majority of the 650 lawmakers had declared themselves “Remainers” and as had been widely speculated, by Tony Blair, the former Labour Prime Minister, and Owen Smith, the Labour leadership candidate, among others, that Remain-supporting MPs could use a Parliamentary vote to stop Brexit. Opponents maintain that since the EU referendum result is not legally binding, elected lawmakers should review the vote before the process is started.

Mr Smith last week set out plans to block Article 50 in Parliament. He said: “Under my leadership, Labour won’t give the Tories a blank cheque.

 

“We will vote in Parliament to block any attempt to invoke Article 50 until Theresa May commits to a second referendum or a general election on whatever the EU exit deal emerges at the end of the process. I hope Jeremy will support me in such a move.”

Tony Blair made a similar suggestion earlier this year as he suggested that Britain should be open to the idea of holding a second referendum: “If, as we start to see the details emerge of what this new world we are going into looks like, what are the practical effects, then parliament has got a role. The country should carry on being engaged in this debate, it should carry on expressing its view.”

However, Telegraph sources say that because Mrs May believes that “Brexit means Brexit” she will not offer opponents the opportunity to stall Britain’s withdrawal from the EU. A Downing Street source said: “The Prime Minister has been absolutely clear that the British public have voted and now she will get on with delivering Brexit.”

May has allegedly consulted with government lawyers who have told the new PM she has the executive power to invoke Article 50 and begin the formal process of exiting the European Union without a vote in Parliament.

That remains to be decided: a group of lawyers has mounted a legal challenge in a bid to force Mrs May to hold a parliamentary vote.  The case, which will be heard in the High Court in October, argues that Article 50 cannot be invoked until the European Communities Act of 1972 is repealed.

However government lawyers are confident that they will win, paving the way for Article 50 to be triggered at the beginning of next year, which could see Britain leave the European Union in 2019.

Bill Cash, a eurosceptic Conservative MP and leading Brexit campaigner, said:  “It sounds emphatic and that’s what we want to hear.

 

“There were people who are threatening to try and stop Brexit. The bottom line is that here is nothing that could possibly be allowed to stand in its way. Everyone in Europe is expecting it, the decision has been taken by the British people and that’s it. Let’s get on with it.”

While the vast majority of establishment economists and media outlets launched an unprecedented scaremongering campaign ahead of the vote to scare the British people into voting no on Brexit, which they had predicted would unleash a sharp recession, so far that has not happened – the BOE recently backtracked on its gloom and doom prediction of a “sharp” recession and is now predicting modest growth in 2017…

 

… and if anything recent data suggest that the UK, while experiencing a modest slowdown, may ultimately benefit from the sharp drop in sterling (tourism has already seen a dramatic bounce), and an inflow of foreign capital once the doomsday scenario does not materialize.

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Submitted by MN Gordon via EconomicPrism.com,

A brief scan of the financial and economic landscape – both in the U.S. and abroad – offers ample confirmation that we are in the midst of a great reset.  From a feint tickle at the turn of the new millennium to a persistent itch a decade ago, the preponderance of evidence in this regard is now much too painful to ignore.  There’s no denying that things ain’t right.

Debt is increasing while GDP’s stagnating.  Stocks are rising while earnings are declining.  Incomes are flat-lining for the majority of workers while growing by leaps and bounds for the 1 percent.  Plus there’s over $13 trillion of negative-yielding debt.

With all this going on, what’s become lucidly clear is the frank understanding that there’s nothing that can really be done to reverse it.  No executive order.  No monetary policy adjustment.  No congressional stimulus package.  No presidential candidate.

None of these, or any other conceivable command and control options, can really do a thing about it.  In fact, at this point, even the most well-intentioned of government programs will likely make the ultimate breakdown and dissolution much, much worse.  The hole’s already been dug far too deep to climb out of.

In short, the economic model of the second half of the 20th century is over.  Increased issuances of debt no longer translate into increased economic growth.  Instead, they produce wild asset price swings, casino style speculation, and epic bubbles and busts.  Nonetheless, the technocrats continue offering up yesterday’s solutions with unabashed certainty.

Bird-Dogging the Fed

Many of the heavy hitters within the monetary policy realm have presently gathered in Jackson Hole, Wyoming, for their annual powwow.  No doubt, they’re using the juncture to pontificate on the glories of an elastic currency.  They’re also flattering the brilliance of a centrally planned economy.

Will they offer a hint or inkling about how much longer they’ll press the federal funds rate to near zero?  This may be asking too much.  After eight years they’ve yet to achieve their objective; consequently, they may never get there.

On Friday morning Fed Chair Janet Yellen will deliver her speech.  Some believe she’ll use the occasion to provide clear and concise communication to investors.  We have some reservations.

The scuttlebutt on the street is that the title of the symposium is “Designing Resilient Monetary Policy Frameworks for the Future.”  We don’t quite comprehend what this means.  But it may have something to do with the fact that stock market investors are bird-dogging the Fed, and the Fed doesn’t know what to do about it.  Thus far, Yellen and her cohorts are petrified to do anything to upset them.

Hence, to achieve resilient monetary policy the Fed would have to do the opposite of what it has done since the advent of the Greenspan put following the October 1987 stock market crash.  They’ll have to withdraw liquidity at the very moment that markets move against overleveraged investors.

In other words, they’ll need to accept a market crash, and subsequent economic contraction, in the hope of attaining some credibility.  Not since the days of tall Paul Volcker has this been something the Fed’s been willing to do.

The Number One Factor Influencing Fed Monetary Policy

Perhaps Yellen will take the opportunity to make a big pronouncement.  Perhaps she’ll admit to the immense wealth destruction the Fed has wrought over the last 100-years.  She may even announce termination of the Fed, discontinuation of Federal Reserve notes, and a return to the gold standard.

Alas, this is all highly unlikely.  In truth, it’s near impossible.  But that doesn’t mean it’s wrongheaded to mention.

The point is, over the last decade – or more – we’ve consistently underappreciated the number one factor influencing Fed monetary policy.  In particular, we’ve underappreciated the extent to which the dumbass factor has taken control of the hearts and minds of the money price fixers.  Here we turn to Jeffery Miller, of StockResearch, for edification.

“Central banks keep reloading and doing dumber and dumber things, and since their stupidity seems to know no bounds, I’m willing to say that I don’t know how dumb things will get before they stop.  What I do know is that locking in a guaranteed loss on bonds that are held to maturity is not a good way for investors to meet their long-term liabilities.  Think pension plans and insurance companies for example.  Central banks are eviscerating them.  How insolvent pension systems and life insurance companies can be good for the global economy is beyond my pay grade, but then again, I don’t have a Ph.D. in economics.”

Here at the Economic Prism we don’t get it either.  But what do we know.  Realistically, Yellen will go dumber.  Like her prior two predecessors she’ll do everything she can to bankrupt retirement accounts and pension funds because liquidity trap graphs tell her economic salvation depends upon it.

Good lord!  Now that’s just plain dumb.

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A lot of speculation continues to swirl around exactly what remaining information Wikileaks has related to Hillary Clinton and when it will be revealed.  Earlier in the week we noted (see “WikiLeaks’ Assange Warns Clinton Campaign: More “Unexpected”, Game-Changing Emails Loom“) Assange’s comments that Wikileaks is in the process of reviewing “thousands of pages of materials” related to Clinton which he described at “significant.”

“We have a lot of material, thousands of pages of material.  There’s a variety of different types of documents and different types of institutions that are associated with the election campaign, some quite unexpected angles that are, you know, quite interesting, some even entertaining.”

Yesterday, in an interview on Fox and Friends, Assange went a little further disclosing his belief that the information currently under review is the “most interesting and serious” yet.

“Well, I think the most interesting and serious [disclosures] relate to upcoming publications we have.”

When asked whether WikiLeaks has information on the Republican campaign he noted that while they do have information its difficult to find anything more controversial on Trump than what comes out of his “mouth every second day.”

“The problem with the Trump campaign is it’s actually hard for us to publish much more controversial material than what comes out of Donald Trump’s mouth every second day.”

 

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Submitted by Alice Salles via TheAntiMedia.org,

The EpiPen is a useful device for individuals who suffer from severe allergies. So when news broke that Mylan, the sole maker of the autoinjector “pens” in America, had hiked the prices of its products from $57 each in 2007 to $600 for a package of two in 2016, news outlets had a field day.

Promptly after, politicians seized the opportunity to bank on this crisis by promising to “do something.”

Presidential hopeful Hillary Clinton urged Mylan to voluntarily slash the prices of its products while promising that, once she’s elected, her “plan to address exorbitant drug price hikes like these” will be finally implemented. This is a particularly empty promise considering Mylan has donated between $100,000 and $250,000 to the Clinton Foundation, which was recently revealed to be peddling influence in exchange for cash.

Senators Susan Collins (R-ME) and Claire McCaskill (D-MO) are also pressuring the manufacturer to disclose more about its pricing. Even Senator Joe Manchin (D-WV) — whose own daughter, Heather Bresch, serves as Mylan’s CEO — weighed in, claiming he, too, shares his colleagues’ “concerns about the skyrocketing prices of prescription drugs.”

But none of what these politicians are saying rings true to anyone who’s paying attention. Here’s why.

The Monopolistic Origins of the EpiPen

The autoinjector known as the EpiPen provides injections of epinephrine in cases of serious or even life-threatening allergy attacks. It is derived from another product known as the Mark I NAAK ComboPen, a device created for a monopoly: the U.S. military.

The device was designed by Sheldon Kaplan for Survival Technology, Inc., a company with a long history of working with the Pentagon. Once the ComboPen was created, it was sent to the U.S. military to treat soldiers who had been exposed to nerve agents.

In 2007, Mylan “purchased the generic drugs division of Germany’s Merck KGaA for $6.7 billion,” acquiring the EpiPen brand of autoinjectors. Under Merck, the devices cost $7 each, which resulted in just $200 million in gains each year, a mere 5 percent of Merck’s revenue at the time.

But Bresch saw potential in this simple plastic device and focused on how to make the newly purchased brand something that could be widely used. For her dream to come true, she needed the assistance of experts in the monopoly business. That’s when she turned to the U.S. government for help.

The FDA, Washington, and Crony Capitalism Are All to Blame

Though the EpiPen is not covered by patent protection, Bresch’s close relationship with Washington may have helped her company ensure competition wasn’t an issue.

In an article for the Mises Institute, Jonathan Newman writes that “Mylan has been repeatedly protected from competition, and it has repeatedly (and predictably) increased the price of EpiPens in response.”

According to Bloomberg, Mylan has been aggressive in its approach to regulators.

For the past seven years, Bresch has been “[turning] to Washington for help. Along with patient groups, Mylan pushed for federal legislation encouraging states to stock epinephrine devices in schools.”

In 2010, when the FDA launched new federal guidelines related to epinephrine prescriptions, Mylan stopped selling single pens, switching to twin-packs. Bloomberg reports that, at the time, “35 percent of prescriptions were for single EpiPens,” but as the new rules were implemented, Mylan “changed label rules to allow the devices to be marketed to anyone at risk.” While the guidelines targeted persons who had severe allergic reactions only, Bresch saw the rule changes as “big events that we’ve started to capitalize on,” she said in October of 2011.

After a seven-year-old died due to an allergic reaction to peanuts at a Virginia school, Congress passed a law pressuring states to ensure its schools had epinephrine devices on hand at all times. The year this bill passed, Mylan spent over $1 million in lobbying alone. Now, Bloomberg reports, “47 states require or encourage schools to stock the devices.”

As part of the EpiPen popularization plan, Mylan started handing out “free EpiPens to more than 59,000 schools” in 2012. In 2014, the company allegedly spent $35 million on TV ads, and in 2015, Mylan signed a deal with Walt Disney, stocking theme parks and cruise ships with the devices. Between 2012 and 2015, the company also spent over $6 million in lobbying.

Over the past seven years, Bresch’s persistence and power-driven attitude helped the company spread the EpiPen far and wide, causing its use to grow 67 percent in the United States. EpiPen prescriptions are now so common that pediatric allergist Robert Wood from Johns Hopkins University School of Medicine says EpiPen is the new “Kleenex.”

But making the EpiPen so popular wasn’t an easy task, mostly because Mylan finally bumped into some competition along the way.

Competition Drives Prices Down — And Mylan Wasn’t Down with That

In 2009, Pfizer Inc., the world’s biggest drugmaker, and Mylan sued Teva Pharmaceutical Industries Ltd. over a patent-infringement. At the time, the Israeli company was accused of using Mylan’s design without permission. But in 2012, both parties reached an agreement, and Teva was allowed to seek approval from the FDA for its epinephrine injecting device.

According to Gizmodo, Teva has failed to obtain approval from the FDA to develop affordable generic versions of the EpiPen. The company says it won’t try to go through the same process again until 2017.

The only other device that was closer to competing with Mylan’s EpiPen was Auvi-Q, and it was also driven out of the market. In 2015, the company launched a recall campaign claiming the devices could be delivering faulty dosages.

“Epinephrine is extremely cheap,” reported Jonathan Newman. In order to understand why Mylan was able to raise the prices of EpiPen, we mustn’t look at the device or drug. We also cannot blame the markets for this issue. Instead, we must look at how Mylan keeps competition at bay.

In a free market scenario, “[a] firm cannot just willy-nilly raise their prices without a competing firm leaping in to give consumers what they want at a lower price,” Newman explains. But in the real world, “Mylan has a great friend who keeps would-be competitors out of the market, or at least makes it so difficult for them that they eventually go out of business.” Mylan’s friend, in this case, is the FDA — a government agency.

Without the ability to pay corporations any favors, Washington power players would not be passing resolutions and pieces of legislation that benefit Mylan. In order to understand why Mylan’s monopoly over the EpiPen has driven the prices up, we must look at the system at hand.

The current environment favors this influence game played by both government officials and corporate drones, but ultimately, the consumer pays the price for their follies. And that’s why few members of the mainstream media are taking the time to explain this relationship. Mostly because, they too, are involved in this systemic influence scheme.

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Earlier this week, we reported of an daunting predicament facing the dramatically underfunded Illinois Teachers Retirement System (TRS), the state’s largest pension fund which is only 41.5% funded: cut its existing future returns assumption from 7.5% to 7.0% (which was previously lowered from 8.0% in 2014) and suffer the wrath of the state’s governor Bruce Rauner, who would be forced to implement even more unpopular tax hikes, or keep its existing projected returns, and potentially suffer an even greater shortfall – and greater taxpayer funding needs – over the long-run if it was unable to hit its bogey.

Despite tremendous political pressure, on Friday afternoon, the Board of Trustees for the Illinois Teachers’ Retirement System, which serves almost 400,000 teachers, voted to cut the assumed rate of return to 7% from 7.5%. “We have to do what we believe is the right thing,” Richard Ingram, the pension’s executive director, said during the board meeting in Springfield.

As a reminder, Illinois’ fiscal 2017 pension payment to its five retirement systems was estimated at $7.9 billion, up from $7.6 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March report by a bipartisan legislative commission. The country’s fifth-largest state’s unfunded pension liability stood at $111 billion at the end of fiscal 2015, with TRS accounting for more than 55 percent of that gap.

This is how the Chicago Tribune summarized the Pension Fund’s dilemma:

“if the board voted for the 7 percent figure, state government would be on the hook to make up the difference, estimated to cost an extra $400 million to $500 million a year, an expense that would come due starting in July. The governor and lawmakers would have to find that extra money, worsening a state budget that’s already in free fall amid a budget impasse that’s lasted more than a year. Alternatively, if the board voted for the 7.5 percent figure, the state would not have had to pay all of that extra money right away. But if investments failed to hit the benchmark, the shortfall would have been tacked on to the pension fund’s $65 billion debt. Taxpayers would be hit either way; the question was whether it would be in the short term or long term.”

Needless to say, fearing a popular revulsion, Gov. Bruce Rauner wanted TRS to delay the decision, which was “odd position for him to be in” considering Rauner has long criticized state and city government for kicking the can down the road on financial issues, and yet that’s precisely what he was advocating as he tried to delay the teacher pension decision.

To be sure, the chronic under-funding of the pension system is not Rauner’s doing and predates him: TRS was created in 1939, and in no year since then has the system received enough money from the state to keep it fully funded. However, when push came to shove, and when the governor’s office learned that the change was afoot, his team mounted an effort to block it, firing off memos that warned of a secretive attempt by the TRS board to saddle taxpayers with a new, unaffordable expense. 

As a result, Michael Mahoney, Rauner’s senior advisor for revenue and pensions, unleashed the “fire and brimstone” scenario, writing to the governor’s chief of staff, Richard Goldberg. “If the (TRS) board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services,” Mahoney also cautioned that “unforeseen and unknown automatic cost increases will have a devastating impact on the state’s ability to provide adequate resources to social service programs and education,” and would lead to “crippling” tax hikes.

This is how we simplied the verbal pressure the fund was facing from politicians:

“please keep your heads stuck in the sand, and dare not admit the reality of near-zero returns in the new normal, but instead keep the projected return rate at 7.5%, or else you will not only admit just how much bigger the underfunding hole truly is, but the resultant surge in public anger following the broad rise in taxes coupled with cuts to pensioner benefits could lead to millions of furious voters sweeping all of Illinois’ current career politicians right into the unemployment office.”

When the verbal threats failed, as trustees prepared to consider the question Friday morning, Rauner attempted to stack the board with allies by appointing new trustees to fill three vacancies the Tribune adds. Had that move been successful, Rauner may have had a majority of the votes on the board. It’s made up of 13 members — six trustees appointed by the governor and six chosen by pension system members, and it is chaired by the state superintendent of schools, also an appointee of the governor.

 

Bruce Rauner and his wife Diana

 

However, Rauner erred by attempting to fill one of those seats with a person who hailed from Chicago. State law requires that appointees reside in an area that is covered by the retirement system. Chicago teachers have their own pension system and aren’t covered by TRS. Rauner’s staff said the erroneous appointment was the result of a “miscommunication” and withdrew it. As a result, just 12 trustees were seated for the Friday vote. Ten voted in favor of lowering the expectations on returns, while Rauner’s two new appointees abstained.

As a result, the TRS voted to lower its long-term return estimate to 7%, “given widespread belief that retirement funds won’t continue to perform as well as they have in recent years.”

Naturally, Rauner was furious. His spokesman Lance Trover blasted the decision as a blow to taxpayers, and questioned whether legal requirements to provide advance notice of such a meeting had been met.

“With less than two hours’ notice, Illinois taxpayers including our social service providers and small business owners were just handed a bill for nearly a half-billion dollars,” Trover said in a statement. “While questions remain about the legality of today’s action, it further underscores the need for real pension reform in Illinois.”

The irony deepens because, as the Tribune notes, Rauner – a wealthy PE executive – sold himself to voters as a businessman with the financial discipline to right Illinois’ ship. That the first-term governor found himself on the other side of that message by resisting calls to better fund a historically shortchanged pension fund was an indication of Rauner’s continued struggle to grapple with the pressures of governing when they run up against his political promises.

He won’t be the last.

Meanwhile, even Rauner’s allies on the TRS board were convinced that the financially responsible move was to lower expectations and start sending more dollars to the pension fund. The vote came after an actuary chided the trustees for the state’s poor funding of its pension systems. “When you’re paying a bill off, you want to at least make some progress toward paying the bill off,” said Kim Nicholl, an actuary with Segal Consulting, who lamented that in Illinois “your bill keeps getting bigger and bigger each year.”

In what was one of the more somber analogies, Nicholl said that “at some point, it starts to come down. But it would be like taking out a 30-year mortgage on your home and then not paying your mortgage payment so that at the end of the year you have to take out a bigger loan and then start paying it again.”

Sadly, in a world of low returns, there is no simple explanation; in fact, as we put it several weeks ago, it is an “unsolvable math problem” in a world of ZIRP and NIRP, and as the Tribune said “Taxpayers would be hit either way; the question was whether it would be in the short term or long term.”

Perhaps the biggest surprise is that Illinois politicans decided on a short-term hit, despite knowing that by deciding to make pensioners whole on legacy funding promises, they put their own careers in jeopardy as the taxpayer blowback would be swift and merciless to the existing administration. 

Finally, as we concluded earlier this week, “this is precisely the fight that countless ponzi schemes, pardon pension funds, across the US will be forced to go through in the coming months, unless somehow the Fed funds a way to guarantee 8% returns every year, or else sending inflation soaring, and wiping out the fund’s liabilities.”

For now, however, the “hit” will end up as a new line item to local tax bills, first in Illinois then everywhere else, as the gradual bailout of pension funds by taxpayers across the nation (and then, the world) begins.

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While not as dire as the recent analysis by Deutsche Bank which calculated that a recession over the next 12 months is more than likely, with odds rising to 60%, overnight JPM released its latest recession probability analysis, and – somewhat unexpectedly following the last two stellar job reports and a full court political press that the recovery has rarely been stronger going into the election – now sees a 37% chance of a recession in the next 12 months. This is the highest recession probability calculated by Jamie Dimon’s bank during the current economic cycle, and matches the odds first laid out in early July.

While the rising odds of a US recession are not surprising on their own, what is notable is that even JPM highlights the disconnect between the economy and the financial markets, observing that “as risk markets have rallied somewhat since our last update, the probability from the model based on macroeconomic data is now considerably above our models based on financial markets“, confirming once again how distorted the relationship between the markets, supported by central banks, and the underlying economy has become.

Here is how JPM’s Jesse Edgerton came with this number:

US recession risk tracker back up on weak business sentiment and profits

After dropping to 30% on July 8, our preferred macroeconomic indicator of the probability that a recession begins within 12 months has risen back to 37%, equaling its high for the expansion. (Table 1, bottom row and Figure 2, blue line).

As risk markets have rallied somewhat since our last update, the probability from the model based on macroeconomic data is now considerably above our models based on financial markets (Table 2).

Since our last update, consumer sentiment and auto sales have both improved, but most other near-term indicators have softened. The four-week average of initial claims for unemployment insurance edged up over the last month, the Senior Loan Officer Opinion Survey showed business credit conditions tightening more rapidly, and single-family building permits fell in July. But the most notable development in the near-term data has been the deterioration in the business sector sentiment surveys, particularly for nonmanufacturing. The nonmanufacturing surveys from Markit and the New York, Philly, and Richmond Feds all moved down in their August readings, and our composite sentiment index moved down noticeably (Figure 3).

The measure of recession risk based on all of the near-term indicators has moved up to 25%, its highest reading in the last several months (Table 1, third row from bottom and Figure 3, orange line).

This morning’s GDP report also included the first read on corporate profits in the second quarter. The report incorporates preliminary data from the Census Bureau’s Quarterly Financial Report, which includes private businesses, in addition to earnings reports from public companies. Profits fell significantly short of our forecast, and the margin measure that enters our recession model moved down, raising the model’s “background risk” of recession to 35%. But, as we noted in our last update, the profits and margins data can be subject to large revisions, raising the question of whether we should discount some of the swings in these data.

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As it turned out Janet Yellen did in fact shock the market, and not just once but twice, when her initial “hawkish” comments were reappraised as very dovish, after the market focused on the language discussing the purchase of “other assets” in the future, which however was followed by an anticlimatic hint of a “September rate hike” from Stanley Fischer, who promptly killed the market’s post-kneejerk euphoria.

 

So what went wrong? Citi’s Steven Englander explains:

What’s gone wrong?

• Market (and I) expected Fed hike discussion to  be centered on December and it turns out September and maybe September and December are more in play than thought
• Fischer comment in response to Liesman’s question on possibility of September/two hikes: “ I think what the Chair said today was consistent with answering yes to both of your questions, but these are not things we know until we see the data.”  What isn’t clear is if he actually was speaking on Yellen’s behalf. The language could, but does not necessarily, imply this.
• Investor debate is whether they are putting September on radar screen because
  • they think it should be live or
  • it is hard to look apolitical if you preclude a hike after strong economic numbers, but will find a reason not to hike when push comes to show
  • Will pass on September but tee up December
• Market had trimmed long risk positions a bit, but probably bought some back before Fischer comments hit the air so position cutting when equities and bonds reversed was brutal.

 

I still think they will hold in September, but they clearly want it to be more live. As long as the odds are rising,  we are likely to see pressure on EM currencies and USD strength. The world of bond and equities selling, and rising risk aversion, is a nasty one for high yielding EM. We could also have a discontinuity between the Friday close and Sunday open depending on what further comments are made. The discontinuity could be in both directions if Fed speakers come out dovish again, even if the extent of the dovishness is to emphasize December or September, but the biggest pain is if  the string of hawkish September comments continue.

 

Separately, there is some pushback on the idea that Yellen is prospectively advocating buying equities and bonds as a way of augmenting monetary policy in the next downturn.  But I think she is defending the current framework against those who argue that the long period of low rates leaves them with no ability to respond to a slump. Williams said make policy aim for higher inflation, other talks about nominal GDP; Reifschneider shows room for stimulus if you get fed funds to 200-300bps but by implication if fed funds starts lower stimulus is ineffective. 

Her response is that they have additional tools that they can deploy – i.e. buying other assets. Note her full quote (my bold):

“On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets.”

So the answer to ‘How do you stimulate the economy when there are no more conventional rate or unconventional QE/forward guidance tools?’ is ‘Broaden the set of assets that you can buy”. And while Congress may be unwilling when the unemployment rate is under 5%, they may be more willing at 7% if a recession is underway….and this means they can continue to do slow and unsteady hikes, based on the current framework. It also negates (at least in theory) analysis that says you can’t raise rates near zero because the cost of a mistake is too high. You have a fall back which is buying other assets.

In other words, all Wall Street believes the Fed will need to “purchase a broader set of assets”, is for a recession to hit, which will promptly force Congress to change the appropriate legislation (as hinted by Yellen) and expand the universe of assets eligible for Fed monetization. Which means that as of this moment, the big money is “axed” to push for the opposite of a recovery.

And even if that does not happen, the Fed can simply fall back to its tried and true TSY QE. Conveniently, earlier this week’s Fed staffer David Reifschneider calculated how much the next QE would have to be, in order to offset a sharp US recession: $4 trillion, or more.

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Every once in a while I write about topics that seemingly have nothing to do with investing, but for those that are able to connect the dots, they will actually find great value in these seemingly unrelated topics to wealth building and preservation strategies. As it is the weekend, I’m releasing an article that we originally posted on our website  about the topic of meditation and investing on 19 August 2016. Again, to first read our articles when we release them, subscribe to our article feed here. Here is the entire article below.

 

Recently, I wrote about a behavioral phenomenon called the “It Won’t Happen to Me” syndrome that prevents many of us from separating perceived reality from actual reality, and I discussed how acceptance of false precepts about investing and self-preservation can lead us to make wildly irresponsible decisions that are dangerous to our self-preservation, including decisions to do nothing when one should act. One of the easiest things we can do on a daily basis that won’t cost us a penny, yet can help us achieve a tremendous level of clarity that allows us to separate the false paradigms and precepts that we have often already embraced from the staggeringly different reality that often exists, is the simple practice of meditation.

 

There are many different forms of mediation, including Zazen, Mindfulness Based Stress Reduction (MBSR), Kundalini Yoga, Vipassana meditation, and Transcendental Meditation (TM), just to name a few. I recommend TM or MBSR because it has been scientifically proven, in peer reviewed studies published in accredited medical journals, that one does not even need to believe in the beneficial effects of TM and MBSR to reap the beneficial rewards of practicing these forms of meditation. Though I’ve read a few articles and books about TM over the course of my lifetime, I personally believe that there are sufficient resources online to at least start practicing now. The important part of the equation is to start today, and to stop procrastinating. If you feel you need an instructor down the road, then you can seek out a local instructor down the road, but it certainly is not necessary, in my opinion, to spend thousands of dollars to receive a personal mantra from a maharishi, as is sometimes recommended, or to even spend hundreds of dollars taking an intensive course, whether online or in person, to receive the benefits of a daily meditative practice.

 

When I was younger and intensely training in martial arts as well as sparring regularly, my sensei would begin every class with a brief 5 minute period of Zazen meditation in which he would ask all of us to release all the work stresses that may have accumulated in our body from work conflicts experienced earlier in the day, to empty our mind to allow it to be receptive to learning whatever techniques we were focusing on that day, and to calm our mind to increase our focus during our training and sparring sessions. No matter how stressful any work matters I had dealt with earlier in the day had been, I always felt much better even after such a brief period of meditation. In fact, my Sensei encouraged all of us to meditate daily, so also supplemented this brief 5-minute period of meditation with a longer 15 to 20 minute daily session before I went to sleep each day.

 

However, back then, because I was unaware of the scientific research regarding meditation, I never connected the dots even though I had some remarkable experiences that I now attribute to my daily meditative practice. I can clearly recall one sparring session with a Muay Thai boxer during which everything seemed to be moving in slow motion, whereby I could sense every kick and every knee a fraction of a second before my sparring partner delivered them. However, each time, I easily moved out of the way or blocked his strikes. I literally felt as if my sparring fighter could not hit me. Another time, when engaged in a training session, I informed my Sensei before class that I had a fever, so I asked him to forgive me that day if I was a little slow in reacting to my training partners. In fact, just the opposite happened, and I was so sharp that day with my techniques that my Sensei sarcastically commented, “You should be sick every day!”

 

Later that evening, when I was trying to fathom the reason for my exceptional training session, I deduced that my better-than-normal display of skill that day was attributable to the fact that my sickness stopped me from thinking and put my muscle memory entirely in charge. In other words, my primordial instincts took over, allowing my “flow”, my “chi”, or whatever you want to call it, to be particularly strong that day. I felt a certain stillness that day when training that seemed to heighten all my senses, including my intuition, whereby I could predict my opponent’s strikes before he even threw them, very similar to my sparring session with the Muay Thai boxer. It’s odd that many people view people that practice daily meditation as “soft”, as I discovered that not only did daily meditation make me a much better fighter, but it also served to calm any fears and anxiety I had prior to, and during, my sparring sessions.

 

In fact athletes often call this state of mind as “being in the zone”. I’m sure fans of basketball can recall the 1997 NBA finals game between the Chicago Bulls and the Utah Jazz, when Michael Jordan had the flu and was so sick that he couldn’t even stay upright on the bench. Despite his weakened physical condition, Jordan still dropped 38 points on the Jazz, in a virtuoso performance in which every point he scored was critical in an eventual 2-point win for the Bulls. Again, with Jordan that day, I think his physical disadvantage that day forced him to rely more on the mental aspects of the game, and this allowed him to more easily enter the “zone.”

 

And this zone is something that meditation replicates. Many people mistakenly assume that great ideas come from relentless work habits and an indomitable work discipline, but just the opposite is true. When someone is so tired from relentless work, there is no energy from which creativity and great ideas can be born. Great ideas are born during those moments when the mind is still and the clarity exists to formulate new and creative ideas. If the concept that ideas are born out of nothingness and spaces of calmness and clarity seems foreign to you, then allow me to use an analogy of physical fitness. There is a concept in professional sports called overtraining. This is when someone, whether a sprinter, a UFC fighter, a football player, or a soccer player, trains so relentlessly for such a long period of time that he does not allow his muscles to adequately heal and recover from his training sessions. When an athlete overtrains, this inevitably leads to sub-optimal performance during a fight or a game.

 

If you are a workaholic, and the days blend into weeks, weeks into months, and months into years, and you never giver your mind adequate time to rest, chances are that you are going to have a mental breakdown. Furthermore, chances are that even though you give your mind time to rest during sleep, because you never refresh your mind with a period of calm and clarity during the day, that you may even suffer from frequent periods of insomnia. Can you imagine exercising every day for all hours you are awake, except meals, without every stopping? Most everyone would agree that this type of extreme unrelenting physical exertion is dangerous as it will lead to an eventual breakdown of the body and collapse. However, most people fail to take care of their mind in the same way they would their physical body. If you don’t give your mind ample opportunity to reset every day with a sustained period of calm, then eventually you are going to damage your mind.

 

Fortunately, just two 20-minute daily meditation sessions a day can cure this damage and even reverse the damage that has already been done. In fact, if you are one of those people that toss and turn all night and can’t shut off your mind, then you are an ideal candidate to start a daily meditation practice. According to Dr. Rebecca Robbins, a post-doctoral fellow at the NYU School of Medicine, meditation calms the mind to such a degree that its restorative effects can be greater than even deep stages of sleep. Robbins states that daily mediation offers some of the same benefits, cognitively and physically, from a recovery and a regeneration standpoint as stage-IV deep sleep. In fact, Robbins herself stated that she never was able to reach restful stages of sleep at night until she started meditating.

 

There are many peer-reviewed scientific studies that validate the following findings, but UCLA and Harvard studies are just two of many conducted studies that have proven the following. A daily meditation practice increases the grey matter volume in the brain, increases cortical thickness in the hippocampus, the region of the brain that governs learning and memory, and decreases the volume of the brain in the amygdala, the region of the brain responsible for producing fear, anxiety and stress. Many moons ago, when I was preparing to enter business school, I recall only having 2 weeks to study for the GREs (the graduate business school entrance exam) during a holiday break as I was already enrolled in another graduate program. Though many may believe 2 weeks to be an inadequate period of time to study for any scholastic exam, whether it is the GREs or another graduate level program exam, my daily meditation sessions provided me with great focus and memory retention for those two weeks and I felt surprisingly more than adequately prepared by the time the exam day arrived.

 

I credit my meditation sessions for my ability to respectively score in the very top percentiles of everyone that took the GRE exam in the entire United States that year, with only two weeks of preparation. And this is the power of meditation. I have seen it work in my own life with great success in my martial arts training, my scholastic endeavors and my current business of SmartKnowledgeU. I only wish that I had understood the benefits more fully back when I was mentoring at-risk youth in Philly and when I was mentoring gang members in Los Angeles. Had I more fully understood the benefits of meditation back then, I would have started every one of my mentoring sessions with them with a period of meditation, as I truly believe that meditation would have allowed me to break through to many more of them.

 

If all the above data does not provide enough compelling evidence to convince you that meditation will provide much more heightened levels of clarity that lead to better and more profitable investment decisions, and thus compel you to start meditating, then perhaps this last reason will do so. Dr. Elizabeth Blackburn, who won the 2009 Nobel Prize in medicine for her discovery of protective caps on chromosomes called telomeres, studied the effects of meditation on the length of telomeres. Blackburn reported that there was scientifically significant increases in the length of telomeres among those that meditated on a regular basis versus those that never meditated. Why is this important? Scientific studies have reported that people with longer telomeres have also demonstrated better cognitive ability, improved overall health, higher levels of satisfaction with life, and have had longer lives, than those with shorter telomeres.

 

At the very least, if everyone were to meditate twice a day for just 20 minutes per session, even if you have no desire to gain the inevitable clarity that will transform you into a better investor, the other extraordinary benefits of meditation are sufficient reason to do so, as they will benefit every other aspect of your life. As a result of more people practicing meditation, the world would transform into a kinder, more compassionate world with less angry people, and that is a development that none of us should ever oppose.

 

Fun fact of the day: According to Victor Hugo Criado Berbert, production manager of the 2016 Rio Olympic medals, the gold medals, though they each weighed 500 grams, only contained about 5.84 grams of gold. However, the “gold” medals each contained 494.16g of silver, making them by weight, by value, and by price, a gold-plated silver medal in reality. At today’s respective prices for a 1-troy ounce American Gold and Silver Eagle coin, the gold and silver contained in each gold medal would be priced at $266.07 of gold and $364.63 of silver for a total price of $630.70, assuming that the gold and silver used in the fabrication of the medals are 99.99% fine, which I haven’t been able to confirm. That’s a lot of training for a “gold” medal that doesn’t even contain 1/5 of a single troy ounce of gold and that, by every possible measurement metric, should truly be called a silver metal. That’s also a lot of deception to cheat the “gold” medal winners out of a metal, that according to Warren Buffet and Bill Gates, is just a barbarous relic.

 

 

 

About the author: JS Kim is the Founder and Managing Director of SmartKnowledgeU, a fiercely independent wealth management consulting, research and education firm that focuses on building unique strategies centered around gold and silver assets to build a better tomorrow for everyone. We are excited to announce that we will be launching our SmartKnowledge Wealth Academy very soon. To receive two sample issues of our flagship Crisis Investment Opportunities newsletter, just send a request to ciotrial(at)smartknowledgeu(dot)com.

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