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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…

Drowning In The Money River

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Drowning In The Money River

Why the 99% of us are falling farther behind

It’s a big club and you ain’t in it.
~ George Carlin

If you suspect society is unfair, that there’s a different set of rules the rich live by, you’re right.

I’ve had ample chance to witness first-hand evidence of this in my time working on Wall Street and in Silicon Valley. Simply put: our highly financialized economy is gamed to enrich those who run it, at the expense of everybody else.

The Money River

A recent experience really drove this home for me.

Having received my MBA from Stanford in the late 90s, I remain on several alumni discussion groups. Recently, a former classmate of mine, who now runs her own asset management firm, circulated her thoughts on how today’s graduating students could best access an on-ramp to the ‘money river’.

What’s the ‘money river’? Good question.

The money river is the huge tsunami of investment capital sloshing around the globe, birthed by the historically-unprecedented money printing conducted by the world’s central banks over the past decade. Since 2008, they’ve more than tripled their collective balance sheet:

(Source)

The $13+ trillion in new thin-air money issued to achieve this is truly staggering. It’s so large that the human brain really can’t wrap around it. (For those who haven’t seen it, watch our brief video How Much Is A Trillion? to better understand this.)

But suffice it to say, all that money has to go somewhere. And it first goes into the pockets of those with closest access to it, and of those who direct where it flows.

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

2017 Year In Review

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2017 Year In Review

Markets fiddle while Rome burns

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year’s is no exception. As with past years, he has graciously selected PeakProsperity.com as the site where it will be published in full. It’s quite longer than our usual posts, but worth the time to read in full. A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. — cheers, Adam

Introduction

“He is funnier than you are.”

~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review

Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition—the likes of Dave Barry on one extreme1 and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime.2 (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup).3 I rely on quotes to let others do the intellectual heavy lifting.

“Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.”

~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review

“Just the facts, ma’am.”

~Joe Friday

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

Doug Noland: There Will Be No Way Out When This Market Bubble Bursts

Doug Noland: There Will Be No Way Out When This Market Bubble Bursts

Financial assets will become toxic to hold

This week Doug Noland joins the podcast to discuss what he refers to as the “granddaddy of all bubbles”.

Noland, a 30-year market analyst and specialist in credit cycles, currently works at McAlvany Wealth Management and is well known for his prior 16-year stint helping manage the Prudent Bear Fund.

He certainly shares our views that prices in nearly every financial asset class have become remarkably distorted due to central bank intervention, first with Greenspan’s actions to backstop the markets in the late-1980’s, and more recently (and more egregiously) with the combined central banking cartel’s massive and sustained liquidity injections in the years following the Great Financial Crisis.

All of which has blown the biggest inter-connected set of asset price bubbles the world has ever seen.

Noland foresees tremendous losses as inevitable, as the central banks lose control of the monstrosity they have created:

This is the granddaddy of all bubbles. We are at the end a long cycle where the bubble has reached the heart of money and credit.

There will be no way out. We’re not going to get enough private credit growth to reflate things when this bubble bursts. It’s going to have to come from central bank credit; it’s going to have to come from sovereign debt.

When this bubble bursts, it will shock people how far the central banks will have to expand their balance sheet just to accommodate the deleveraging in the system. And they won’t really be able to add new liquidity to the market; they’re just going to allow the transfer of leveraged positions from the leveraged players onto the central bank balance sheets.

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

You’re Just Not Prepared For What’s Coming

You’re Just Not Prepared For What’s Coming

Not even close

I hate to break it to you, but chances are you’re just not prepared for what’s coming. Not even close.

Don’t take it personally. I’m simply playing the odds.

After spending more than a decade warning people all over the world about the futility of pursuing infinite exponential economic growth on a finite planet, I can tell you this: very few are even aware of the nature of our predicament.

An even smaller subset is either physically or financially ready for the sort of future barreling down on us. Even fewer are mentally prepared for it.

And make no mistake: it’s the mental and emotional preparation that matters the most. If you can’t cope with adversity and uncertainty, you’re going to be toast in the coming years.

Those of us intending to persevere need to start by looking unflinchingly at the data, and then allowing time to let it sink in.  Change is coming – which isn’t a problem in and of itself. But it’s pace is likely to be. Rapid change is difficult for humans to process.

Those frightened by today’s over-inflated asset prices fear how quickly the current bubbles throughout our financial markets will deflate/implode. Who knows when they’ll pop?  What will the eventual trigger(s) be? All we know for sure is that every bubble in history inevitably found its pin.

These bubbles – blown by central bankers serially addicted to creating them (and then riding to the rescue to fix them) – are the largest in all of history. That means they’re going to be the most destructive in history when they finally let go.

Millions of households will lose trillions of dollars in net worth. Jobs will evaporate, causing the tens of millions of families living paycheck to paycheck serious harm.

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

Fed Official Decries Bitcoin as “Not Backed”

Fed Official Decries Bitcoin as “Not Backed”

Bitcoin is backed by the use value of the distributed ledger in the underlying technology of the Blockchain.
Randal K. Quarles, a Trump administration appointee to the Federal Reserve Board of Governors and Vice Chair for bank supervision, has given a lengthy speech (“Thoughts on Prudent Innovation in the Payment System”) that directly targets Bitcoin as a danger to the monetary and financial system.

To reiterate, an official speaking for the nation’s central bank that manages the global reserve currency – the institution that has long bragged about its power to bail out the entire world with the magic powers of the alchemist – has put down Bitcoin for being untrustworthy, unbacked, and unsound.

Discrediting Crypto

The timing here seems about right. Nine years ago, Bitcoin was born, but only a small group of developers were really paying attention. Today, there are lines forming at Bitcoin ATMs around the country as people scramble to convert cash to digital money even at absurdly high premiums.

With one unit of Bitcoin now worth 10,000 times the US dollar, it makes sense that the Fed would begin to feel a bit defensive. Indeed, the speech comes to the defense of the central bank, the existing money, and payment system networks, and calls for the pace of innovation to be controlled by regulators in the interest of “prudence.”

His summary criticism of Bitcoin is that:

The “currency” or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all. Indeed, how to treat and define this new asset is complicated.

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

Ron Paul: We Are Reaching A Point Of No Return

Ron Paul: We Are Reaching A Point Of No Return

When the system will break no matter what the Fed tries

Ron Paul Book: The Revolution At Ten Years

Dr. Ron Paul has long been a leading voice for limited constitutional government, low taxes, free markets, sound money, civil liberty, and non-interventionist foreign policies.

Dr. Paul served as the US Representative for Texas’s 27th Congressional District from 1976 to 1985. He then represented the 14th district from 1977 to 2013. He ran for the office of US President, three times, most recently in the 2012 Republican primaries. Dr. Paul also had a long career as an OBGYN over which he delivered more than 4,000 babies.

The recent author of the book, The Revolution At Ten Years, Dr. Paul looks ahead at the future of the movement he helped launch — tackling central planning, the military empire, cultural Marxism, the surveillance state, the deep state, and the real threats from these institutions to our civil liberties.

As a multi-term member of Congress, Dr. Paul knows the players and policies responsible for the growing unfairness and inequality now rampant in society. He does not expect the offenders will reform willingly. Instead, he predicts the system will collapse under its own unsustainability — offering a rare and valuable chance then for more sound and fair solutions to prevail:

Wealth doesn’t come from the creation of money, especially a fiat system. With too much fiat money and all this credit, eventually the economy becomes exhausted and engulfed with debt and mal-investments. The treatment for this is a correction; you have to allow the debt to be liquidated. You have to get rid of the mal-investment and you have and to allow real economic growth to start all over again. But that wasn’t permitted in ’08 and ’09, which is why there’s been stagnation.

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

What Could Pop The Everything Bubble?

A crisis that can’t be solved by just printing more dollars

I’ve long held that if a problem can be solved by creating $1 trillion out of thin air and buying a raft of assets with that $1 trillion, then central banks will solve the problem by creating the $1 trillion out of thin air—nothing could be easier.

This is the lesson of the past eight years: if a problem can be solved by creating new money and buying assets, then central banks will solve that problem.

Problem: stock market is declining. Solution: create new money and buy, buy, buy stock index funds. Problem solved! Market stops falling and quickly rebounds as “central banks have our backs.”

Problem: interest rates are inhibiting lending and growth. Solution: create a few trillion units of currency and buy enough sovereign bonds to drop interest rates to near-zero.

Problem: nobody’s left who can afford to buy the new nosebleed-priced flats that underpin China’s miracle-grow economy. Solution: create new currency, lend it to local government agencies who then buy the empty flats.

Problem: stagnant employment and deflation. Solution: create a trillion in new currency, buy a trillion in new government bonds that then fund infrastructure projects, i.e. bridges to nowhere.

And so on. Any problem that can be solved by creating a few trillion out of thin air and buying assets will be solved.  The mechanism to solve these problems—creating currency out of nothing—is like a perpetual motion machine: there are no intrinsic limits on the amount of new money that can created at near-zero interest, as the interest payments can be funded by new money.

Even better, the central bank (the Federal Reserve) buys Treasury bonds with the new currency that generate income, which is then returned to the Treasury: a perpetual-motion money machine!

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

Political Economics

Political Economics

Who President Trump ultimately picks as the next Federal Reserve Chairman doesn’t really matter. Unless he goes really far afield to someone totally unexpected, whoever that person will be will be largely more of the same. It won’t be a categorical change, a different philosophical direction that is badly needed.

Still, politically, it does matter to some significant degree. It’s just that the political division isn’t the usual R vs. D, left vs. right. That’s how many are making it out to be, and in doing so exposing what’s really going on.

As usual, the perfect example for these divisions is provided by Paul Krugman. The Nobel Prize Winner ceased being an economist a long time ago, and has become largely a partisan carnival barker. He opines about economic issues, but framed always from that perspective.

To the very idea of a next Fed Chair beyond Yellen, he wrote a few weeks ago, “we’re living in the age of Trump, which means that we should actually expect the worst.” Dr. Krugman wants more of the same, and Candidate Trump campaigned directly against that. As such, there is the non-trivial chance that President Trump lives up to that promise.

Again, it sounds like a left vs. right issue, but it isn’t. The political winds are changing, and the parties themselves are being realigned in different directions (which is not something new; there have been several re-alignments throughout American history even though the two major parties have been entrenched since the 1850’s when Republicans first appeared). Who the next Fed Chair is could tell us something about how far along we are in this evolution.

What Krugman wants, meaning, it is safe to assume, what all those like him want, is simple: success. He believes that the central bank has given us exactly that, therefore it is stupid to upset what works.

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

Betrayal!

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Betrayal!

The pervasive & defining crime of our age

Let me apologize in advance for what may be an upsetting piece of writing for some of you. If you’re in a state of shock or exhaustion from recent events, perhaps you should skip this one.

I don’t offer this analysis in order to further distress anyone — but until you understand what is happening and how that influences your psychological state, you’ll remain the emotional equivalent of a rag doll shaken to-and-fro by events.

Such understanding may not bring you to a place of calm acceptance. But it will set you free.

Betrayal

The recent acts of violence in the US, especially the horrific mass shooting in Las Vegas, are not arising out of a vacuum. Nor are the Brexit vote, the election of Trump, or the recent Catalonian vote for secession, random unconnected acts.

These — and future similarly disruptive events sure to come — are all arising out of the fact that we all have been betrayed.

For the purposes of this article, let’s define betrayal as:

the sense of being harmed by the intentional actions of a trusted person or institution. The emotional impacts of betrayal may include shock, a sense of loss, grief, damaged self-esteem, humiliation, self-doubt, shame, and anger.

We’re betrayed every time our trust is violated, in small ways or large. An example of a small betrayal might be hiding a frivolous purchase from your partner when you’ve both agreed to stick to a shared budget. A larger betrayal would be infidelity.

But betrayals aren’t limited to relationships between individuals. They can be perpetrated across groups, even nations. Like the enormous betrayal of trust committed when the US sent its military into Iraq on the basis of falsified ‘intelligence’.

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

You’re Likely A Lot Less Prepared For Crisis Than You Realize

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You’re Likely A Lot Less Prepared For Crisis Than You Realize

Lessons from the recent rash of natural disasters

It seems as if Mother Nature is waking up. Either she’s trying to send humans an important warning, or perhaps she’s just out to kill us all.

Massive storms across the globe, earthquakes, and collapsing ecosystems all combine to remind us that we are indeed intimately connected to our planet’s natural systems. And that our well-being rests on staying on Mother Nature’s good side.

Well, Mother Nature has seemed pretty pissed at us of late. Her recent punishments should be taken as a disciplinary wake-up call: It’s time.

It’s time to prepare, everyone. Way past time.

And it’s time to recognize that there are multiplying failure points across the many systems we depend on for our way of life — both natural and man-made. For example:

  • The wealth gap between the rich and the poor is now grossly obscene and yet still growing wider.
  • Our industrially-farmed soils are being depleted of their nutrients.
  • Species are going extinct every single day.
  • Global oil consumption ticks higher every year.
  • Stock price overvaluation is about the highest it’s ever been.
  • Bonds have never been more expensive (i.e. yields have never been lower) in all of recorded history.
  • Debt levels have never been higher (both globally and, in most cases, locally).
  • The planet’s population continues to explode (7.5 billion today, 10 billion by 2050) while key resources deplete at accelerating rates.

Only the foolish, or the seriously self-deluded, would think that these observations and trends will be consequence-free.

Which means we have to begin doing things very differently. We have to change who we are, the actions we take, the investments we prioritize, and even our most fundamental values and priorities.

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

How Capitalist Central Banks Have Been Creating the Next Financial Crisis

How Capitalist Central Banks Have Been Creating the Next Financial Crisis

As central bankers, finance ministers, and government policy makers head off to their annual gathering at Jackson Hole, Wyoming, this August, 24-26, 2017, the key topic is whether the leading central banks in North America and Europe will continue to raise interest rates this year; another topic high on the agenda is when the three major central banks – the Federal Reserve, European Central Bank and Bank of England – might begin to sell off their combined $9.8 trillion dollar balance sheets that they accumulated since the 2008-09 banking crisis.

But the more fundamental question – little discussed by central bankers and academics alike – is what are the likely effects of further immediate rate hikes and/or commencement of central banks’ balance sheet reductions? The assumption is further rate hikes and sell-offs will have little negative impact on the real economy or financial markets. But will they? The effects of hikes and sell off will prove the opposite of what they predict.

Central banks in the US and Europe were grossly in error predicting in 2008 that massive liquidity injections and zero interest rates would re-stimulate their economies and return them to pre-crisis real GDP growth rates. They are now about to repeat a similar error, as they presume that raising those rates, and retracting excess liquidity by selling off balance sheets, will not have a significant negative impact on the real economy or financial markets.

Central banks’ balance sheets have been growing for almost nine years, driven by programs of zero-bound (ZIRP) interest rates and the introduction of firehose liquidity injections enabled by quantitative easing, QE, bond and other securities purchases.

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

Why The Markets Are Overdue For A Gigantic Bust

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Why The Markets Are Overdue For A Gigantic Bust

It’s just not possible to print our way to prosperity
Let me begin with a caveat: confirmation bias is an ever-present risk for an analyst such as myself.

If you’re not familiar with the term, ‘confirmation bias’ suggests that once we’ve invested time and emotional energy into developing a worldview, we’ll then seek information to confirm that view.

After writing about the economy for so many years, I’m now so convinced that we can’t print our way to prosperity that I find myself seeing signs confirming this view everywhere, every single day. So that’s the danger to be aware of when listening to me.  I’m going to keep repeating this mantra and Im going to keep finding data that supports this view.

Based on lots of historical inputs, I have concluded that Printing money out of thin air can engineer lots of things, including asset price bubbles and the redistribution of wealth from the masses to the elites.  But it cannot print up real prosperity.

As much as I try, I simply cannot jump on the bandwagon that says that printing up money out of thin air has any long-term utility for an economy. It’s just too clear to me that doing so presents plenty of dangers, due to what we might call ‘economic gravity’: What goes up, must also come down.

Which brings us to this chart:

The 200 bubble blown by Greenspan was bad, the next one by Bernanke was horrible, but this one by Yellen may well prove fatal.  At least to entire financial markets, large institutions, and a few sovereigns.

It’s essential to note that more than two-thirds of the net worth tracked in the above chart is now comprised of ‘financial assets.’  That is, paper claims on real things.

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

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