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David Stockman: The World Economy Is At An Epochal Pivot

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David Stockman: The World Economy Is At An Epochal Pivot

A ‘Great Reset’ approaches

David Stockman warns that the global economy has reached an “epochal pivot”, a moment when the false prosperity created from $trillions in printed money by the world’s central banks lurches violently into reverse.

There are few people alive who understand the global economy and its (mis)management better than David Stockman — former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier — which is why his perspective is not to be dismissed lightly. He knows intimately how how our political and financial systems work, as well as what their vulnerabilities are.

And Stockman thinks the top for the current asset price bubble era is in — specificially, he thinks it hit its apex in January 2018. As this “Everything Bubble” prepares to burst, Stockman estimates the risk of economic crisis is as great, if not greater than, the 2008 Great Financial Crisis because of the radical and unsustainable monetary policy expansion the central banks have pursued over the past decade.
This has caused the prices of stocks, bonds, real estate and most other assets to appreciate at rates that have no basis in the ongoing income/cash flow of the global economy. In short, they are wildly overvalued.
A key condition that Stockman has been waiting to see, that serves as a signal the bubble’s bursting is nigh, is the concentration of speculative capital into fewer and fewer stocks as the “good” options for investors shrink. We now clearly see this in the FAANG complex (a topic covered in detail in our recent report The FAANG-nary In The Coal Mine)
Stockman’s main warning is that there’s no bid underneath this market — that when perception shifts from greed to fear, the bottom is much farther down than most investors realize. In his words, it’s “rigged for implosion”.

…click on the above link to read the rest of the article…

The Only Existential Threat To Russia Is Neoliberal Economics

The Only Existential Threat To Russia Is Neoliberal Economics

This week I was interviewed on Russian TV about the possible new anti-Russian sanctions that Washington is considering that would prohibit anyone in the entirety of the world from holding Russian government bonds. Think about this for a moment. Washington thinks that Washington has the right and the power to block sovereign countries and their citizens from investing in Russian government bonds. Here we face arrogance that has developed into insanity.

The Russian bonds are an excellent investment. Unlike US, EU, UK, and Japanese government bonds, the Russian bonds pay good interest rates, and Russia has virtually no national debt, unlike the heavily indebted governments of the US, Europe, UK, and Japan.

Moreover, the Russian ruble is protected by immense energy resources on which Europe and China are dependent. The only way the ruble can be driven down is by orchestrated short-selling by Western and Japanese central banks. These central banks can print and waste all the money that they care to. A Western central bank is even less accountable than a Western government.

The Soviet government had more sense than to aleow the ruble to be traded on markets that the West can manipulate, but the Russian government, brainwashed as it is by American neoliberal economists, lacks the understanding of the Soviet government.

All of Washington’s economic threats to Russia are designed to force the Russian government into accepting vassal status, like all of Europe, Canada, Australia, and Japan. The threats can only work because the Russian government and the Economics Institute of the Russian Academy of Sciences have ignored the lessons that Michael Hudson and I taught them. See:

https://www.paulcraigroberts.org/2016/08/10/russias-weakness-is-its-economic-policy-paul-craig-roberts-and-michael-hudson/

https://www.paulcraigroberts.org/2016/09/28/can-russia-learn-from-brazils-fate-paul-craig-roberts-and-michael-hudson/

https://www.paulcraigroberts.org/2016/02/08/privatization-is-the-atlanticist-strategy-to-attack-russia-paul-craig-roberts-and-michael-hudson/

…click on the above link to read the rest of the article…

All Is Not Well In Financial Markets

All Is Not Well In Financial Markets

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It seems to be a hard time for those expressing concern about the build-up of risks in the economic and financial system: the major economies in the world are expanding at a decent clip, credit default concerns are very low, and stock and housing prices keep going up, driven by investor optimism and supported by an ongoing low interest rate environment.

Moreover, cyclical indicators do currently not suggest that something terrible is just around the corner. But of course, there is good reason not to get carried away by the “all is well” mentality that has gripped financial market action. For central banks have, by way of their monetary policies of exceptionally low interest rates, set into motion an artificial upswing (“boom”).

While the boom leads to higher output and employment levels, it also causes — beneath the surface, so to speak — malinvestment on a grand scale: the development of the economies’ production and employment structure is getting diverted from the path it would have taken had there not been a downward manipulation of interest rates on the part of central banks.

Some Theory

This becomes obvious once a sound theory of the interest rate is taken into account, as put forward by the Austrian School of Economics, in particular by Ludwig von Mises. To explain this in some detail, we have to make a distinction between the “pure,” or “originary,” interest rate and the “nominal market” interest rate.

The originary interest rate is inseparably tied to human action: each and one of us value an early satisfaction of a want more highly than a later satisfaction of the same want. In other words: we as human beings value a good that is presently available more highly than the same good available at a future point in time. This is the direct outcome of our time preference.

…click on the above link to read the rest of the article…

“That’s a Super Dangerous Place to Be”: CEO of JPMorgan Asset Management

“That’s a Super Dangerous Place to Be”: CEO of JPMorgan Asset Management

When central banks distort the markets, risk disappears from view.

“You could have a bunch of walking-zombie companies and you don’t even know it,” explained Mary Callahan Erdoes, CEO of JPMorgan Asset Management, on Wednesday at the Delivering Alpha Conference in New York. “That’s a super dangerous place to be,” she said.

She was talking about the effects of the ECB’s bond buying program as part of a broader warning that investors are no longer seeing risks.

The ECB has been buying corporate bonds, among other things, in an explicit effort to distort the bond market and drive corporate bond yields to near zero. At the peak of the frenzy last fall, the average euro junk-bond yield fell to 2.08% — though it has risen since. These are bonds with an appreciable risk of default. But the yield was barely enough to cover inflation (currently 2.0%). Credit risk wasn’t priced in at all.

The bond-buying binge has created a universe of bonds with negative yields, and desperate investors who’ll take any risk without compensation just to cover inflation. This desperation supplies fresh money to burn to even the riskiest zombie companies.

Companies have relentlessly taken advantage of this investor desperation. The amount of corporate euro bonds outstanding has surged by about 45% over the past three years, to €1.5 trillion ($1.75 trillion), including record euro-bonds issued by American junk-rated companies.

When credit risk is not being priced at all – when it’s free – this most important gauge of the credit market is worthless.

“You’re equally rewarding the A-plus student and the student who’s doing no homework and is just showing up,” Erdoes said at the conference, as reported by Bloomberg.

…click on the above link to read the rest of the article…

Central Banks Are Using The Trade War To Hide Their Direct Influence On Stocks

Central Banks Are Using The Trade War To Hide Their Direct Influence On Stocks

There has been a lot of confusion lately in the mainstream economic media as well as in independent media circles as to the behavior of stock markets in the wake of the recently initiated global trade war. In particular, stocks suffered one of the longest runs of negative days in their history in June, only to then spike just after Donald Trump “officially” began trade war tariffs in July. The expectation by many was that the headlines would cause an immediate and continued downturn in equities markets, but this was not the case. Many analysts have been left bewildered.

This is an issue I have touched on multiple times since the beginning of this year, and it is something I predicted long before Trump’s election in 2016. But it is obvious that the schizophrenic nature of stocks needs to be addressed in a very concise, no-holds-barred fashion, because there are still far too many people who are looking at all the wrong causes and correlations.

First, let’s be clear: stock markets are NOT tracking the news headlines. The past month should have proved this if there was any previous doubt.

It is hard for investors and some analysts to grasp this fact, primarily because for at least the past few years it appeared as though stock markets were utterly dictated by headlines out of Bloomberg, Reuters and other mainstream media outlets. Once investors and analysts became used to this narrative it was difficult for them to adapt when the dynamic changed. They are still living in the past based on an assumption that was never quite correct to begin with.

In reality, headlines never actually dictated stock prices; it was always the Federal Reserve among other central banks.

…click on the above link to read the rest of the article…

How A Central Bank Caused One of History’s Biggest Cons

How A Central Bank Caused One of History’s Biggest Cons

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In the summer of 1821, a roguish Scotsman named Gregor MacGregor arrived by boat in London, and initiated arguably the most audacious confidence scam in history. MacGregor had spent much of the previous decade fighting as a soldier of fortune in the Venezuelan War of Independence, where he had manoeuvred his way up the ranks, eventually being promoted to general by Simón Bolívar. At some point during this period, local Central American rulers had granted MacGregor a large tract of land, most of which took the form of uninhabitable, malaria-ridden swamp along the Black River, in modern-day Honduras. Despite the poor economic prospects of his new acquisition, MacGregor was determined that the land should be his ticket to fortune, even if that required unconventional measures.

It was this series of events which led to the ‘founding’ of the non-existent country of Poyais. Upon returning to Britain, MacGregor ingratiated his way into London’s high-society, claiming to be the sovereign prince, or ‘Cazique’, of a newly-formed, British-friendly colony on Central America’s Mosquito coast, supposedly named ‘Poyais’ after the Poyer peoples of that area. In order to convince the British public of the realness of this imaginary country, MacGregor was forced to employ an extremely elaborate series of means, foremost amongst them being the publication of a 355-page guidebook for prospective settlers. This book, likely penned by MacGregor himself, contained a plethora of highly-detailed (and entirely fictitious) descriptions of every aspect of life in Poyais. These included convoluted descriptions of its tricameral parliamentary system and of its commercial and banking systems, distinctly designed uniforms for each regiment of its non-existent armed forces, a fully elaborated honours system, a Poyaisian coat of arms (featuring unicorns), and a national flag.

…click on the above link to read the rest of the article…

NIRP Did It: I’m in Awe of How Central-Bank Policies Blind Investors to Risks

NIRP Did It: I’m in Awe of How Central-Bank Policies Blind Investors to Risks

“Reverse-Yankee” Junk Bond Issuance Hits Record.

It’s paradise for US companies looking for cheap money. They range from sparkly investment-grade companies, such as Apple with its pristine balance sheet, to “junk” rated companies, such as Netflix with its cash-burn machine. They have all been doing it: Selling euro-denominated bonds in Europe.

The momentum for these “reverse Yankees” took off when the ECB’s Negative Interest Rate Policy and QE – which includes the purchase of euro bonds issued by European entities of US companies – pushed yields of many government bonds and some corporate bonds into the negative.

By now, yields in the land of NIRP have bounced off the ludicrous lows late last year, as the ECB has been tapering its bond purchases and has started waffling about rate hikes. Investors that bought the bonds at those low yields last year are now sitting on nice losses.

But that hasn’t stopped the momentum of reverse Yankees, especially those with a “junk” credit rating.

Bonds issued in euros in Europe by junk-rated US companies hit an all-time record in the first half of 2018, “taking advantage of decidedly cheaper financing costs in that market,” according to LCD of S&P Global Market Intelligence.

In the first half, US companies sold €8.2 billion of these junk-rated reverse-Yankee bonds, a new record (chart via LCD):

These bonds are hot for European investors who are wheezing under the iron fist of NIRP that dishes out guaranteed losses even before inflation on less risky bonds. Anything looks better than bonds with negative yields.

And here is why it makes sense for US companies to chase this money: It’s still ultra-cheap particularly for lower-rated companies. The chart below shows just how much sense it makes for the companies – though investors are going to have their day of reckoning.

…click on the above link to read the rest of the article…

We Are All Hostages of Corporate Profits

We Are All Hostages of Corporate Profits

We’re in the endgame of financialization and globalization, and it won’t be pretty for all the hostages of corporate profits.
Though you won’t read about it in the mainstream corporate media, the nation is now hostage to outsized corporate profits.
The economy and society at large are now totally dependent on soaring corporate profits and the speculative bubbles they fuel, and this renders us all hostages: “Make a move to limit corporate profits or speculative bubbles, and your pension fund gets a bullet in the head.”
Not just pension funds, of course; tax revenues will also be taken out and shotas most of the state and federal income taxes are paid by high-earners and those skimming capital gains from stock options and stock-based compensation packages.
Political and financial authorities have caved in to the implicit threat, lest their share of the corporate swag be tossed in the ditch. To appease public anger, various bureaucratic thickets have been created, but as you can easily see, corporate profits have not been affected.
The global downturn resulting from China’s tightening of credit in 2016 caused a remarkably under-reported panic in central banks, which pulled out all the stops to keep corporate profits high.
Subsidies, tax breaks and exclusions keep the profits flowing not just to corporate managers and owners but politicos, lobbyists and the entire food chain that serves the top of the wealth-power pyramid in America.
Notice the difference between normal and abnormal profits? The enormous speculative boom of the dot-com era doubled corporate profits in a mere decade, but those gains pale compared to the tripling in profits since the 2002 downturn:

…click on the above link to read the rest of the article…

Eric Peters: “People Assume That Stocks Always Rise Over Time. They’re Wrong”

This week on the MacroVoices podcast, host Erik Townsend welcomed Eric Peters, the CEO and CIO of One River Asset Management, for a discussion about the long-term future of the US economy, and how demographics, the expanding US debt, and the waning influence of central banks will impact growth, inflation and – most importantly – markets.

Peters

After a brief discussion about the future of USD hegemony, and the factors that could lead to the dethroning – so to speak – of the dollar, the two plunged into a discussion about one of the most vexing issues of the modern US economy: Why sub-4% unemployment hasn’t driven a runup in inflation back toward levels witnessed before the financial crisis.

We’ve all looked at the stats, and we’re now at an unemployment rate in the US of sub-4% – 3.8%–3.7%. I think what a lot of people focus on is if the participation rate were back where it was pre-2008 you’d end up with an unemployment rate that had an 8 handle or something like that. So that’s what people are referring to. But making comparisons like that is difficult because a lot of things are changing. The US labor force is shrinking because people are getting older. There is the opioid issue. And this disability issue. Which are difficult to really handicap in terms of how big an impact that’s having on the US labor force.

Up until recently, the actions of central bankers have been much more important to markets in a general sense than the behavior of politicians. But that’s about to change…

…click on the above link to read the rest of the article…

US Dollar Hegemony Tripped Up by Chinese Renminbi?

US Dollar Hegemony Tripped Up by Chinese Renminbi?

Um, no. Central banks not enthusiastic about the renminbi.

Global central banks are not dumping US-dollar-denominated assets from their foreign exchange reserves. They’re not dumping euro-denominated assets either. And they remain leery of the Chinese renminbi – despite China’s place as the second largest economy in the world and despite all the hoopla of turning the renminbi into a major global reserve currency.

This is clear from the IMF’s just released “Currency Composition of Official Foreign Exchange Reserves” (COFER) data for the first quarter 2018. The IMF is very stingy with what it discloses. The COFER data for each individual country – each country’s specific holdings of reserve currencies – is “strictly confidential.” But it does disclose the global allocation of each major currency.

In Q1 2018, total global foreign exchange reserves, including all currencies, rose 6.3% year-over-year, or by $878 billion, to $11.59 trillion, within the upper range of the past three years (from $10.7 trillion in Q4 2016 to $11.8 trillion in Q3, 2014). For reporting purposes, the IMF converts all currency balances into US dollars. This data was for Q1. The dollar bottomed out in the middle of the quarter and has since been rising.

US-dollar-denominated assets among foreign exchange reserves continued to dominate in Q1 at $6.5 trillion, or 62.5% of “allocated” reserves (more on this “allocated” in a moment).

Over the decades, there have been major efforts to undermine the dollar’s hegemony as a global reserve currency, which it has maintained since World War II. The creation of the euro was the most successful such effort. The plan was that the euro would eventually reach “parity” with the dollar on the hegemony scale. Before the euro, global exchange reserves included the individual currencies of today’s Eurozone members, particularly the Deutsche mark. After the euro came about, it replaced all those. And its share edged up for a while until the euro debt crisis spooked central banks and derailed those dreams.

…click on the above link to read the rest of the article…

Emerging Market Crisis Spreads To The Core, Central Banks Face Catch-22

Emerging Market Crisis Spreads To The Core, Central Banks Face Catch-22

One of the things giving “data-driven” central banks wiggle room on their pledge to tighten monetary policy is the fact that there are several definitions of inflation. In the US the thing most people think of as inflation is the consumer price index, or CPI, which is now running comfortably above the Fed’s target. But the Fed prefers the personal consumption expenditures (PCE) price index, which tends to paint a less inflationary picture. And within the PCE universe, core PCE, which strips out energy and food, is the data series that actually motivates Fed action.

And that, at long last, is now above the 2% target, having risen 2.3% in the past year.
On the following chart, the core PCE is the blue line. Note the steepening slope towards mid-year. This is clearly a trend with some momentum which, if it continues, will take this index from slightly above target to substantially above.

PCE inflation

A more surprising above-target reading just came from Germany, which didn’t used to have inflation of any kind. But now it does:

(Reuters) – German inflation surpassed the target set by the European Central Bank for the euro zone in June, the second month in a row it has done so, lending support to the ECB’s decision to close its bond purchase scheme at the end of the year.

Data published by the Federal Statistics Office on Thursday showed that EU-harmonised German consumer prices rose 2.1 percent year-on-year. The same measure had increased by 2.2 percent in May. The yearly figure matched a Reuters forecast.

German inflation

Again, note the pop over the last couple of months. If this is sustained, the European Central Bank will have to speed up its leisurely tightening pace. Right now it’s scaling back its bond-buying but not signaling higher rates – which will definitely have to be on the menu if German inflation stays above 2%.

…click on the above link to read the rest of the article…

Make Capital Cheap and Labor Costly, and Guess What Happens?

Make Capital Cheap and Labor Costly, and Guess What Happens?

Employment expands in the Protected cartel-dominated sectors, and declines in every sector exposed to globalization, domestic competition and cheap capital.

If you want to understand why the global economy is failing the many while enriching the few, start with the basics: capital, labor and resources. What happens when central banks drop interest rates to near-zero? Capital becomes dirt-cheap. It becomes ludicrously easy to borrow money to buy whatever cheap capital can buy: stock buybacks, robots, automation tools, interest-sensitive assets such as housing, competitors or potential competitors, high-yield emerging-market bonds, and so on.

What happens when cartels take control of core domestic industries such as banking, defense, higher education and healthcare? Costs soar because competition has been throttled via regulatory capture, and these domestic sectors are largely non-tradable, meaning they can’t be offshored and have little meaningful exposure to globalization.

Labor-intensive cartels such as these can pass on their rising costs for labor, resources and profiteering. Do you really think assistant deans could be pulling down $250,000 annual salaries in higher education if there was any global or domestic competition?

As for healthcare, I’ve often noted that healthcare/sickcare will bankrupt the nation all by itself. When a cartel such as healthcare / sickcare can force higher prices on employers and employees, the cost of labor throughout the economy rises.

Sickcare Will Bankrupt the Nation–And Soon (March 21, 2011)

Can Chronic Ill-Health Bring Down Great Nations? Yes It Can, Yes It Will (November 23, 2011)

You Want to Fix the Economy? Then First Fix Healthcare (September 29, 2016)

As I’ve indicated on the chart, labor-intensive cartels in non-tradable sectors–higher education, defense/national security, healthcare and banking– can pass on their rising labor costs to their captive customers.

…click on the above link to read the rest of the article…

The Growing Pool of Real Savings Permits the Illusion That Central Bank Can Cause Economic Growth

Many commentators are of the view that the US central bank should pursue policies that will prevent the possible decline of the economy into a liquidity trap hole. What is this all about?

In the popular framework of thinking that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.

Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.

For instance, if for some reason people have become less confident about the future, they will cut back their outlays and hoard more money. Therefore, once an individual spends less, this will worsen the situation of some other individual, who in turn also cuts his spending.

A vicious circle sets in – the decline in people’s confidence causes them to spend less and to hoard more money, and this lowers economic activity further, thereby causing people to hoard more, etc.

Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of money supply and aggressively lower interest rates.

Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, thereby re-establishing the circular flow of money, so it is held.

In his writings however, Keynes suggested that a situation could emerge when an aggressive lowering of interest rates by the central bank would bring rates to a level from which they would not fall further. As a result, the central bank will not be able to revive the economy.

…click on the above link to read the rest of the article…

Weekly Commentary: Performance Chase

Weekly Commentary: Performance Chase

The Nasdaq Composite, Nasdaq 100, small cap Russell 2000, Value Line Arithmetic and the NYSE Arca Biotechnology were among U.S. indices trading to all-time highs during Wednesday’s session. In the real world, there is escalating risk of a destabilizing global trade war. The Shanghai Composite sank 4.4% this week to two-year lows. It was another week of instability for emerging market equities, bonds and currencies – especially in Asia.

Here at home, it’s difficult to envisage a more divided electorate or a more hostile political environment. Record securities and asset prices and such a sour social mood appear quite the extraordinary dichotomy. Yet I would argue that speculative financial market Bubbles, heightened global tensions and domestic social and political angst all have at their root cause decades of unsound “money” and Credit (an archaic notion, I fully appreciate).

“Inflation is always and everywhere a monetary phenomenon…”, Milton Friedman explained some 50 years ago. At the time, Dr. Friedman was contemplating goods and services inflation. Financial, monetary management and technological developments over recent decades ensured that asset inflation evolved into the much more destabilizing form of inflation. A Bubble collapse presented Dr. Bernanke the opportunity to test his academic theories, unleashing unprecedented monetary inflation specifically targeting securities markets. His policies spurred similar monetary inflation around the world that has continued for almost a full decade.

Cut short rates to zero, print “money,” buy bonds; force market yields lower; spur buying of risk assets and higher securities prices; orchestrate powerful wealth effects; households and businesses borrow and spend; the economy expands; inflation rises back to target – and all is good. Sure, there’s some risk that asset prices get ahead of the real economy. Not to worry. Central banks will ensure a steadily rising general price level – and inflating earnings and incomes – to catch up to elevated asset prices. All will be well.
…click on the above link to read the rest of the article…

The End of Growth

The End of Growth

Either it ends, or we do.
More and more, I hear that folks are feeling frustrated and betrayed, combined with a sense of loss and despair. I feel this way, too.

As I’ve written recently, I observe this is due more than anything else to a widespread demoralization society is suffering from.

Certainly the statistics reflect this. Suicides in the US are up 30% since the turn of the millennium, obesity is at epidemic proportions, mortality rates are rising especially among white working-class Americans, and our national opioid addiction is now the “epidemic of epidemics.”

To these we can also add falling birthrates and the truly startling shift towards a younger age for the onset of depression; declining from age 30 now to age…14(!)

When an organism gives up on self-care, breeding, or its will to live, it’s suffering from a tremendous amount of strain that is cutting it off from its own life force.  A dispirited lion wasting away in a cage has a lot in common with the average American today.

At a deep level, what ails us is not a host of unrelated, intractable problems, but the fact that our model of pursuing eternal economic growth simply isn’t working anymore. It doesn’t work for the planet’s increasingly strained ecosystems, nor does it work for the bottom 99% of folks in society (i.e., the non-elites).

The various health epidemics noted above are merely symptoms of a larger acute spiritual crisis.

But viewed at a certain angle, this may be a good sign.

Why? Because in order to shift from one model to another, the old one first has to become unbearable.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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