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Michael Pento: When The Yield Curve Inverts Soon, The Next Recession Will Start

Michael Pento: When The Yield Curve Inverts Soon, The Next Recession Will Start

Expected timing: this Fall

Collectively, the world’s major central banks have pumped $1.1 trillion into the markets over the past year.

The result of all this money printing is now well known: massively inflated real estate, stock and bond asset price bubbles, as well as extraordinary wealth and income gaps across society.

Some day all of this insanity will end. But how? Will it unwind in an orderly and polite way, as the world’s central planners hope? Or will be disorderly, resulting in painful portfolio losses and mass layoffs?

Michael Pento, fund manager and author of The Coming Bond Bubble Collapse returns to the podcast this week to offer his prediction that events will most likely take the latter route. In fact, he sees the developing inversion of the yield curve as a dependable precursor to the US economy entering recession as soon as this Fall:

The Fed is now raising rates. They raised rates from 0% up to 2%. They’re supposed to do it again in September/October. And again in December. That will be four hikes this year.

They are also selling assets, aka ‘draining their balance sheet’. I say ‘selling’ because that’s exactly what they have to do. Let’s say the Fed is holding a 10-year note that’s due: if they want to destroy that money, they say “OK, Treasury, give me the principal”. The Treasury doesn’t have any money so it has to go the public and raise money. Well, the Treasury will have to do that to the tune of $50 billion per month come October. Right now it’s $30, it has to go in July to $40 billion a month then it goes to $50 billion. That’s $600 billion a year added to the public supply of Treasurys they have to actually finance at a market rate. That’s on top of the $1.2 trillion debt we’re going to have in fiscal 2019.

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

A Hard Rain’s a-Gonna Fall

A Hard Rain’s a-Gonna Fall

The prospects for the rest of the year are awful

Après moi, le déluge

~ King Louis XV of France

A hard rain’s a-gonna fall

~ Bob Dylan (the first)

As the Federal Reserve kicked off its second round of quantitative easing in the aftermath of the Great Financial Crisis, hedge fund manager David Tepper predicted that nearly all assets would rise tremendously in response.

“The Fed just announced: We want economic growth, and we don’t care if there’s inflation… have they ever said that before?”

He then famously uttered the line “You gotta love a put”, referring to the Fed’s declared willingness to print $trillions to backstop the economy and financial makets.

Nine years later we see that Tepper was right, likely even more so than he realized at the time.

The other world central banks followed the Fed’s lead. Mario Draghi of the ECB declared a similar “whatever it takes” policy and has printed nearly $3.5 trillion in just the past three years alone. The Bank of Japan has intervened so much that it now owns over 40% of its country’s entire bond market. And no central bank has printed more than the People’s Bank of China.

It has been an unprecedented forcefeeding of stimulus into the global system. And, contrary to what most people realize, it hasn’t diminished over the years since the Great Recession. In fact, the most recent wave from 2015-2018 has seen the highest amount of injected ‘thin-air’ money ever:

Total Assets Of Majro Central Banks

In response, equities have long since rocketed past their pre-crisis highs, bonds continued rising as interest rates stayed at historic lows, and many real estate markets are now back in bubble territory. As Tepper predicted, financial and other risk assets have shot the moon.

And everyone learned to love the ‘Fed put’ and stop worrying.

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

Making Sense of The Federal Reserve

I was given a lecture in Toronto to our institutional clients years ago and the central bank of Canada came with ten people. It was an interesting session because the audience began to ask me questions about what the central banks were looking at to make their decisions. I would answer and then the audience would immediately turn to see their response. It was a really fascinating session that turned me into this quasi-spokesperson for the central banks. I would respond and usually swat down these absurd theories one after another. The head of the Bank of Canada I knew well and the whole table was unbelievable poker-players. They never flinched nor did you get any read from any body language. When it was over, I went up to them and apologized saying I hoped I did not insult them in any way. They reply was astounding: “Marty, I only wish I could tell these fools we do not look at this stuff!”

People attribute the central banks will also sort of theories you would think they were the all-powerful demigods of finance. Decoding what a central bank says is very important. Yet I find all the commentary to be so off the mark it is laughable. The new word the Fed likes to use is its increasing reliance on “transitory” factors to explain the past six-year problem of being unable to reach the Fed’s 2% inflation target. They explain the failure with “transitory price changes” in some components such as health care and financial services. That was in their minutes from the May 1-2, 2018 meeting. When you look closely, price changes become “transitory” on the downside as well as “transitory”when they move on the upside. Indeed, they love to explain trends as “transitory” for that avoids any permanent trend forecast.

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

Beware of the Coming Economic Debt Bomb

“There is a sword of Damocles hanging over the head of every American. Sadly, it is about to drop.”

Sorry for the drama, but I need to get your attention.

We know that the Fed has kept interest rates low for many years until recently. Why did it do so? Here are some of the reasons we have been told:

  • The Fed wanted to stimulate the economy.
  • The Fed wanted to make it easier for Americans to borrow.
  • The Fed wanted to create a “wealth effect” to encourage spending.

Which of these statements do you think explains the primary reason for the Fed’s decision to keep interest rates low? Don’t bother. It is none of the above.

The primary reason the Fed kept interest rates low was to avert an economic catastrophe. Today, that catastrophe can no longer be avoided. The trigger for the economic explosion is the rising interest payments on the federal debt.

Let’s go through the numbers.

During the eight years of the Obama administration, our total national debt rose from $12.3 trillion to $20 trillion while interest rates sank to a new all-time low. (The national debt figure includes money owed by the government to itself. The debt held by the public is what interests us since the government must pay out the interest to those bond holders.)

In 2009, the year President Obama took office, the national debt held by the public was $7.27 trillion. At the end of fiscal 2016, that had soared to approximately $14 trillion. Given that our marketable debt doubled from 2009 to 2016, it’s remarkable that the annual cost of the interest on the debt rose far less, from $185 billion to $223 billion.

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

Nomi Prins: Collusion!

Nomi Prins: Collusion!

How central bankers rigged the world

Nomi Prins, Wall Street veteran turned financial industry reformist returns to the podcast this week to explain the findings within her new book Collusion: How Central Bankers Rigged The World.

Nomi has put together a timeline of exactly when and how the central banks have plundered the wealth of the masses since 2008, either directly or indirectly through the loss of purchasing power of the currencies they control:

The relationship between the Central Banks, the major ones — the Fed, Europe Central Bank, Bank of Japan — all the larger Central Banks in the world and their private banks was effectively, and is effectively, kept secret. The relationships they have with each other, a lot of it is secret; so you have to really dig in to it to find out what’s really going on.

What I did was dig into the documents that I could find and create a timeline. That’s why each chapter in each region starts in 2008. It works with Mexico, Brazil, Japan, China and Europe and juxtaposes that with what the Fed was doing at that time to see how that collusive behavior wound up happening. The secret-ness is in the relationships of the banks, where that money that was fabricated by these institutions actually went, and when — or if — it’s coming back.

The ‘cheat and deceiving’ part of that definition is also apparent: people have been cheated out of their futures from the standpoint of the central banks’ strategies. So when the Feds creates cheap money, companies and banks and countries borrow more from the future because it is so cheap and easy. This deceives many people into thinking that the economy is somehow therefore being helped by this strategy, which is in acutality an emergency strategy. It’s an emergency that’s gone on now for ten years.

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

Doug Duncan: Even US Government Economists Predict Trouble Ahead

Doug Duncan: Even US Government Economists Predict Trouble Ahead

Fannie Mae forecasts an economic slowdown by 2019

Doug Duncan is not your average beltway economist.

The chief economist for Fannie Mae is surprisingly outspoken about the troublesome outlook for the US economy. He’s worried about the rising cost of debt service as outstanding credit continues to mount at the same time interest rates are starting to ratchet higher, too.

He predicts the US will enter recession within a year, concurrent with a topping out of America’s real estate market. It wouldn’t surprise him to see the stock market falter, too, as central banks around the world begin a coordinated tightening of monetary policy and — similar to the thoughts recently expressed within our podcast with Axel Merk — Doug expects Jerome Powell to be much more reluctant to intervene in attempt to support asset prices. Having met personally with Powell, Doug thinks the Fed is now happy to see some of the air come out of the Everything Bubble (just not too much and not too fast) — a market change from past Fed administrations:

Our forecast definitely sees slowing economic activity, particularly in the second half of ’19. Part of it has to do with the length of the expansion. Just because an expansion is long doesn’t mean it’s going to end; but they all have eventually ended, and this one is getting pretty old. I think if it’s not the second longest, it’s getting to be the second longest that we’ve ever had shortly.

The tax bill was viewed differently by different parties, but the capital markets initially took that — plus the $300 billion agreement to get past the expiration of government funding plus the budget agreement — they took all those things as inflationary.

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

Wolf Richter: The Era Of The Fed “Put” Is Over

It now wants lower asset prices (just not too fast)

To all those investors expecting the Fed to step in to backstop the recent weakness seen in the stock market, Wolf Richter warns: The cavalry isn’t coming.

After years of force-feeding too much liquidity into world markets, the central banking cartel is now aware of the Franken-markets it has created. And now with a new head at the US Federal Reserve, and soon at the ECB, central bankers have shifted their priority from supporting asset prices to now actively engineering lower prices.

They just don’t want prices to drop too far too fast.

Of course, the big question is: how much control do they really have? The situation may very quickly get out of their hands.

But the big takeaway is to expect lower prices across the board for nearly every “risk on” asset: stocks (including and especially the FANGS), corporate bonds and real estate. The Fed is working to reduce investor exuberance — and as many bloodied contrarian investors will warn you — Don’t fight the Fed:

Now we’re in an environment where we have an Everything Bubble, and even though there’s still a few central bankers out there that say that they can’t see the bubble, others have now acknowledged it. Of course they don’t call it a “bubble”; they say that prices are “elevated”. So they’re seeing this. In my opinion, a lot of the responses from the Fed are not really about inflation; they’re really about trying to avoid the asset bubble from getting any bigger. They’re trying to avoid a deflation of that asset bubble that could be very messy for the financial system.

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

Who Needs Wall Street When You Can Have A Monetary Unicorn?

Who Needs Wall Street When You Can Have A Monetary Unicorn?

The single most important price in all of capitalism is the interest rate—-and at all points on the maturity curve. And the single most important truth about honest interest rates is that they must be discovered by markets, not imposed by the state.

We got to ruminating about those core propositions when we read that San Francisco Fed head, John Williams, may be headed toward the true #2 job at the Fed. That is, President of the New York Fed—-the joint that actually runs the casinos domiciled in the canyons of Wall Street.

We did not burst out laughing exactly, but nearly so. After all, why do you even need Wall Street if you are going to have John Williams running the joint?

Recall that Dr. Williams claims to see a financial apparition that no one has ever touched, measured, photographed, X-rayed or otherwise proven the existence of. We are referring, of course, to the “Neutral Rate of Interest”.

By contrast, Dr. Williams is certain that he has spotted it, measured it and completely understood it. Indeed, he is so certain that in recent times it has been extraordinarily low, that he wants to run the entire $19.7 trillion US economy on the basis of it.

That is, peg actual interest rates in the money market based on a theoretical rate that might as well be the equivalent of a Monetary Unicorn. That’s because no one on the bond and bill trading desks of Wall Street has ever seen it, or ever will.

Not only that, but Dr. Williams now suggests that we actually need even more inflation than the sacred 2.00% target to cure whatever ails the US economy, and that his Monetary Unicorn told him so. Thus, as per the AM’s Wall Street Journal:

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

An Inflation Indicator to Watch, Part 3

An Inflation Indicator to Watch, Part 3

“During the 1980s and 1990s, most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon.”
—Ben Bernanke

Ben Bernanke began his oft-cited “helicopter speech” in 2002 with a few kind words about his peers, including the excerpt above. Speaking for central bankers, he took a large share of the credit for the low inflation of the 1980s and 1990s. Central bankers had gained a “heightened understanding” of inflation, he said, and he expected the future to bring even more inflation-taming success.

Of course, Bernanke’s cohorts took a few knocks in the boom–bust cycle that followed his speech, but their reputations as masters of inflation (and deflation) only grew. Today, the picture he painted seems even more firmly planted in the public mind than it was in 2002, notwithstanding recent data showing inflation creeping higher.

Public perceptions aren’t always accurate, though, and public figures aren’t the most reliable arbiters of credit and blame. In this 3-part article, I’m proposing a theory that challenges Bernanke’s narrative, and I’ll back the theory with data in Part 3. I’ll show that it leads to an inflation indicator with an excellent historical record.

But first, let’s recap a few points I’ve already discussed.

The Endless Tug-of-War

In Part 2, I said inflation depends on a tug-of-war between purchasing power (on the demand side) and capacity (on the supply side), and the war takes place within the circular flow, in which spending flows into income and income flows back to spending. Two circular-flow patterns and their causes demand particular attention:

  1. When banks inject money into the circular flow in the process of making loans, they can boost spending above the prior period’s income, thereby fattening the flow (or the opposite in the case of a deleveraging).

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

Gold–The Next Big Surprise

GOLD – THE NEXT BIG SURPRISE

It’s been a while since I have written about precious metals. To some extent, this has been on purpose. I am a long-term fan of our little yellow friend, but there are definitely periods when I am more bullish than others. Over the past half year, my enthusiasm for precious metals has been tempered by one important chart…

During this period, the yield on the US 5-year TIPS (Treasury Inflation Protected Security) has been steadily rising. It’s not a perfect comparison, but you can think about this as the risk free real yield – the yield you will earn after inflation.

Many market pundits mistakenly believe inflation is the most important determinant of gold’s price level. That’s simply not the case. Although the great bull market of the late 1970’s was accompanied by high inflation, the 2005-2011 rise was in the midst of tame inflation, with CPI even ticking below zero for a period.

No, inflation is just one part of the puzzle for gold. The other important piece is the nominal interest rate. In the 1970’s, inflation was running at 10% or even higher. But for a while, interest rates were lower than the inflation rate. The real yield was therefore negative. In this environment, gold provided an attractive alternative to holding cash and other fixed income instruments that were suffering from financial repression. After all, gold is also a currency, with no yield. Yet the real benefit is that it is no one’s liability. With positive real yields it is difficult to justify owning gold, but push those yields into negative territory, and suddenly gold becomes more appealing.

And that’s exactly what happened in the 2000s. Inflation was low, but interest rates were even lower, creating one of the greatest precious metals bull markets of all time.

 

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

Daniel Nevins: Economics for Independent Thinkers

Daniel Nevins: Economics for Independent Thinkers

It’s time we stop trusting the ‘experts’

Economists are supposed to monitor and analyze the economy, warn us if risks are getting out of hand, and advise us on how to make things runs more effectively — right?

Well, even though that’s what most people expect from economists, it’s not at all how they see their role, warns CFA and and behavioral economist Daniel Nevins.

Economists, he cautions, are modelers. They pursue academic lines of thought in order to make their models more perfect. They live in a universe of equations and presumptions about equilibrium states and other chimerical mathematical perfections that don’t exist in real life.

In short, they are the wrong people to advise us, Nevins claims, as they have no clue how the imperfect world we live in actually works.

In his book Economics For Independent Thinkers, he argues that we need a new, more accurate and useful way of studying the economy:

However far you go back, you can find economists who had a more realistic approach to how humans actually behave, than the way that mainstreamers assume they behave in the models that the Fed uses to pick winners and losers.

You mentioned credit cycles, business environment, and behavioral economics. What I’ve done is to say, “Okay. We know that the modeling approach, the systems of equations approach doesn’t work. But instead of starting completely from scratch, what can we find in the economics literature that is maybe more realistic?”

And the interesting thing is that if you look at the work that was done, the state of the profession before the 1930s, before Keynesianism took hold, you can find a lot of work that was quite sensible.

 

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

Danielle DiMartino Booth: Don’t Count On The Powell Fed To Rescue The Markets

Danielle DiMartino Booth: Don’t Count On The Powell Fed To Rescue The Markets

The new Fed Chair may break from his predecessors

The recent gut-wrenching drop in asset prices began on the first day of the job for new Federal Reserve Chairman Jerome Powell.

How is Mr. Powell likely to react to a suddenly sick-looking market? Will he step in forcefully to reassure investors that there’s a “Powell put” in place as a backstop?

To address these questions, former analyst at the Federal Reserve Bank of Dallas, Danielle DiMartino Booth, returns to the podcast this week. In her opinion, having studied Powell’s previous statements, she thinks those expecting him to continue the market support his predecessors provided will likely be quite disappointed.

Powell appears to be no large fan of continued quantitative easing, and has long been on the record as concerned about the eventual pain its unwind will cause. He very well may resist riding to the market’s rescue at this time, allowing natural market forces to finally have their way:

Look, this is a message that market participants do not want to hear: It is not the Federal Reserves job to put a floor under risky asset prices.

Compare and contrast Jerome Powell’s silence in the wake of the flash crash on his first day at work to Alan Greenspan — who got on an airplane the day after the Black Monday crash of 1987, canceling an appearance he was to have made, and reassuring the markets with a statement on Tuesday morning that the Federal Reserve was standing by and ready and willing and available to satisfy any kind of disruption in the banking and financial systems. That was the day — October 20, 1987 — that the Greenspan put was born.

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

Red Screen At Morning, Investor Take Warning

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Red Screen At Morning, Investor Take Warning

It’s time for safety. And it’s beginning to pay better, too

Growing up as I did in coastal New England, this old rhyme was drilled into us as children:

Red sky at night, sailor’s delight;

Red sky at morning, sailor take warning.

Because many of the people in town still made their living on the sea, the safety of person and property depended on being able to recognize the signs of approaching danger.

A notably red sky at morning is usually due to sunrise reflection off of moisture-bearing clouds, signifying an arriving a storm system bringing rain, wind and rough seas. Those who ignored a red sky warning often did so at their peril.

Red Sky In The Markets

I’m reminded of that childhood rhyme because the markets are giving us a clear “red sky” warning right now. One that comes after (too) many years of uninterrupted fair winds and smooth sailing.

The markets have plunged nearly 8% over just a single week. And the losses are across the board. Nearly every asset class from stocks to bonds to commodities to real estate are participating in the pain. Market displays are a sea of red.

We’ve written so often and recently of the dangerous level of over-valuation in asset prices (caused by years of central bank intervention) that to re-hash the premise again feels unnecessary.

But the chart below is worth our attention now, as it really drives home just how dangerously over-extended the markets have become. It’s a 20-year chart of the S&P 500, showing how it has traded vs its 50-month moving average (the thin green line).

Importantly, the chart also plots the Bollinger bands for this moving average. These are the thin red (upper) and purple (lower) lines above and below the green one.

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

A Stock Market Tumble Is the Correction We Need

A Stock Market Tumble Is the Correction We Need

The Fed put us in this predicament. Only the market can get us out of it.

Since hitting rock bottom in 2009, stock prices have consistently increased without much volatility — that is, until these first few days of February when the Dow Jones Industrial Average fell over 2,200 points (-8.5%) and the S&P 500 tumbled 7.9% from their late-January highs. The most popular measure of stock market volatility, VIX, also spiked dramatically to levels not seen since 2011 and 2009.

Financial analysts and writers have pointed to a few events that may be behind the big movements in the stock market:

  • Tax reform could have caused some extra uncertainty about the future for all businesses.
  • Bond markets indicate an increase in future price inflation, which means that the cost of doing business could increase.
  • The increase in expected inflation coupled with a new, optimistic-looking release of official data on wages across the US might be used by the Federal Reserve to justify further interest rate hikes.

But to really get to the bottom of the current stock market decline, we need to go back to the Federal Reserve’s response to the 2007-08 crisis.

Unprecedented Monetary Policy

During that financial and economic collapse, the Federal Reserve responded in unprecedented ways. We saw the biggest expansions of credit and the lowest interbank lending rates ever.

(The blue line above shows the Federal Reserve’s balance sheet expansions. The red line is the Federal Funds Rate, or the rate banks pay each other for loans. It is viewed as the basis for all other loan rates in the US. Together, these show the unprecedented expansionary monetary policy of the Fed in response to the most recent recession.)

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

It’s Looking A Lot Like 2008 Now…

It’s Looking A Lot Like 2008 Now…

Did today’s market plunge mark the start of the next crash?

Economic and market conditions are eerily like they were in late 2007/early 2008.

Remember back then? Everything was going great.

Home prices were soaring. Jobs were plentiful.

The great cultural marketing machine was busy proclaiming that a new era of permanent prosperity had dawned, thanks to the steady leadership of Alan Greenspan and later Ben Bernanke.

And only a small cadre of cranks, like me, was singing a different tune; warning instead that a painful reckoning in our financial system was approaching fast.

It’s fitting that I’m writing this on Groundhog Day, as to these veteran eyes, it sure has been looking a lot like late 2007/early 2008 lately…

The Fed’s ‘Reign Of Error’

Of course, the Great Financial Crisis arrived in late 2008, proving that the public’s faith in central bankers had been badly misplaced.

In reality, all Ben Bernanke did was to drop interest rates to 1%. This provided an unprecedented incentive for investors and institutions to borrow, igniting a massive housing bubble as well as outsized equity and bond gains.

It’s worth taking a moment to understand the mechanism the Federal Reserve used back then to lower interest rates (it’s different today). It did so by flooding the banking system with enough “liquidity” (i.e. electronically printed digital currency units) until all the banks felt comfortable lending or borrowing from each other at an average rate of 1%.

The knock-on effect of flooding the US banking system (and, really, the entire world) in this way created an echo bubble to replace the one created earlier during Alan Greenspan’s tenure (known as the Dot-Com Bubble, though ‘Sweep Account’ Bubble is more accurate in my opinion):

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

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