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An Inflation Indicator to Watch, Part 1

An Inflation Indicator to Watch, Part 1

“Inflation is always and everywhere a monetary phenomenon.”
—Milton Friedman

Have you ever questioned Milton Friedman’s famous claim about inflation?

Ever heard anyone else question it?

Unless you read obscure stuff written for the academic community, you’re probably not used to Friedman’s quote being challenged. And that’s despite a lousy forecasting record by economists who bought into his Monetarist methods.

Consider the following:

  • When Friedman’s strict Monetarism fizzled in the 1980s, it was doomed partly by his own forecasts. Instead of the disinflation the decade delivered, he expected inflation to reach 1970s levels, publicizingthat prediction in 1983 and then again in 1984, 1985 and 1986. Of course, years earlier he foresaw the 1970s jump in inflation, but the errant forecasts that came later left him wide open to a “clock twice a day” dismissal.
  • Monetarists suffered an even harsher blow in 2012, when the Conference Board finally threw in the towel on Friedman’s favorite indicator, removing M2 from its Leading Economic Index (LEI). Generally speaking, forecasters who put M2 in their models are like bachelors who put “live with mom” in their dating profiles—they haven’t been successful.
  • The many economists who expected quantitative easing (QE) to wreak havoc on inflation are, of course, on the defensive. Nine years after QE began, core inflation remains below the Fed’s 2% target, defying their Monetarist beliefs.

When it comes to explaining inflation, Monetarism hasn’t exactly nailed it. Then again, neither has Keynesianism, whose Phillips Curve confounds those who rely on it. You can toss inflation onto the bonfire of major events that mainstream theories fail to explain.

But I’ll argue there might be a better way.

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

U.S. Public Debt Surges By $175 Billion In One Day

U.S. Public Debt Surges By $175 Billion In One Day

After the U.S. Government passed the new budget and debt increase, with the President’s signature and blessing, happy days are here again.  Or are they?  As long as the U.S. Government can add debt, then the Global Financial and Economic Ponzi Scheme can continue a bit longer.  However, the days of adding one Dollar of debt to increase the GDP by two-three Dollars are gone forever.  Now, we are adding three-four Dollars of debt to create an additional Dollar in GDP.  This monetary hocus-pocus isn’t sustainable.

Well, it didn’t take long for the U.S. Government to increase the total debt once the debt ceiling limit was lifted.  As we can see in the table below from the treasurydirect.gov site, the U.S. public debt increased by a whopping $175 billion in just one day:

I gather it’s true that Americans like to do everything… BIG.  In the highlighted yellow part of the table, it shows that the total U.S. public debt outstanding increased from $20.49 trillion on Feb 8th to $20.69 trillion on Feb 9th.  Again, that was a cool $175 billion increase in one day.  Not bad.  If the U.S. Government took that $175 billion and purchased the average median home price of roughly $250,000, they could have purchased nearly three-quarter of a million homes.  Yes, in just one day.  The actual figure would be 700,000 homes.

Regardless, we are now off to the races when it comes to adding GOBS of DEBT to continue a Ponzi Scheme that would make Bernie Madoff jealous.

There is so much that I want to write about and put into videos, but there is only so much time in the day.

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

Global Debt Crisis II Cometh

Global Debt Crisis II Cometh

– Global debt ‘area of weakness’ and could ‘induce financial panic’ – King warns
– Global debt to GDP now 40 per cent higher than it was a decade ago – BIS warn
– Global non-financial corporate debt grew by 15% to 96% of GDP in the past six years

– US mortgage rates hit highest level since May 2014

– US student loans near $1.4 trillion, 40% expected to default in next 5 years
– UK consumer debt hit £200b, highest level in 30 years, 25% of households behind on repayments

The ducks are beginning to line up for yet another global debt crisis. US mortgage rates are hinting at another crash, student debt crises loom in both the US and UK, consumer and corporate debt is at record levels and global debt to GDP ratio is higher than it was during the financial crisis.

When you look at the figures you realise there is an air of inevitability of what is around the corner. If the last week has taught us anything, it is that markets are unprepared for the fallout that is destined to come after a decade of easy monetary policies.

Global debt is more than three times the size of the global economy, the highest it has ever been. This is primarily made up of three groups: non financial corporates, governments and households. Each similarly indebted as one another. Debt is something that has sadly run the world for a very long time, often without problems. But when that debt becomes excessive it is unmanageable. The terms change and repayments can no longer be met.

This sends financial markets into a spiral. The house of cards is collapsing and suddenly it is revealed that life isn’t so hunky-day after all. Rates are set to rise and as they do they will spark more financial shocks, as we have seen this week.

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

 

Conflict between Fiscal & Monetary Policy

We are moving into a crisis of monumental proportions. There has been a serious fundamental problem infecting economic policy on a global scale. This conflict has been between monetary and fiscal policy. While central banks engaged in Quantitative Easing, governments have done nothing but reap the benefits of low-interest rates. This is the problem we have with career politicians who people vote for because they are a woman, black, or smile nicely. There is never any emphasis upon qualification. Every other job in life you must be qualified to get it. Would you put someone in charge of a hospital with life and death decisions because they smile nicely?

Economic growth has been declining year-over-year and we are in the middle of a situation involving low-productivity expansion with high and rapidly rising budget deficits that benefit nobody but government employees.  Once upon a time, 8% growth was average, then 6%, and 4% before 2015.75. Now 3% is considered to be fantastic. Private debt at least must be backed by something whereas escalating public debt is completely unsecured. The ECB wanted to increase the criteria for bad loans, yet if those same criteria were applied to government, nobody would lend them a dime.

Monetary policy, after too long a phase of low-interest rates and quantitative easing, has created governments addicted to low-interest rates. They have expanded their spending and deficits for the central banks were simply keeping the government on life-support – not actually stimulating the private sector. Governments have pursued higher taxes and more efficient tax collection. They have attacked the global economy assuming anyone doing business offshore was just an excuse to hide taxes.

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

The Liquidity Punch Bowl

THE LIQUIDITY PUNCH BOWL

It is appropriate with the inauguration of this weekly column to look at the “Big Picture”. The biggest risk to world stock markets, and asset prices in general, in 2018 is that G7 central banks (led by the Federal Reserve) are finally attempting to normalise monetary policy nine years after the American central bank commenced quantitative easing in December 2008, in the midst of the so-called “global financial crisis”.

Since late 2008, G7 central banks, comprising the Fed, the Bank of Japan, the European Central Bank and the Bank of England, have committed to massive balance sheet expansion (through the purchase of mortgage and government debt). Their balance sheets continued to rise in aggregate during 2017 even though the Fed itself stopped expanding its own balance sheet in November 2014. Aggregate assets of G7 central banks increased by 17.2% last year to $15.2tn at the end of 2017, up from US$4.3tn at the beginning of 2008 (see following chart).

Sources: Bloomberg, Federal Reserve, Bank of England, ECB, Bank of Japan, CEIC Data, CLSA

That the Fed has commenced balance sheet reduction from last October is a risk for stock markets since it amounts to another form of monetary tightening, in addition to interest rate hikes. That it has not yet caused market fallout reflects two factors:

  1. The Fed is beginning extremely tentatively by decreasing its reinvestment of principal payments from maturing bonds.
  2. Other G7 central banks are still expanding in aggregate, albeit at a slower pace. This is why there will be much focus on what the European Central Bank will do in coming months. For now, it looks like G7 central bank balance sheets will start to contract in aggregate in 2019 rather than 2018. 

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

Message from Planet Japan: The good times never last forever

Message from Planet Japan: The good times never last forever

After having traveled to more than 120 countries in my life, the only person I know who’s been to more places than I have is Jim Rogers.

Jim is a legend– a phenomenal investor, author, and all-around great guy.

(His book Adventure Capitalist is a must-read, chronicling his multi-year driving voyage across the world.)

Some time ago while we were having drinks, Jim remarked that he occasionally tells people, “If you can only travel to one foreign country in your life, go to India.”

In Jim’s view, India presents the greatest diversity of experiences– mega-cities, Himalayan villages, coastal paradises, and a deeply rich culture.

My answer is different: Japan.

To me, Japan isn’t even a country. Japan is its own planet… completely different than anywhere else in ways that are incomprehensible to most westerners.

(Watch my friend Derek Sivers explain it to a TED audience here.)

On one hand, this is a culture that strives to attain beauty and mastery in even mundane tasks like raking the yard or pouring tea.

Everything they do is expected to be conducted to the highest possible standard and precision.

They start the indoctrination from birth; Japanese schools typically do not employ janitors and instead train children to clean up after themselves.

Later in life, the Japanese salaryman is expected to practically work himself to death (or suicide) for his company.

Obedience and collectivism are core cultural values, and the tenets of Bushido are still prevalent to this day.

One of the most remarkable examples of Japanese culture was the aftermath of the devastating 2011 earthquake (and subsequent tsunami) in the Fukushima prefecture.

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

Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences

Flying Blind, Part 2: The Destruction Of Honest Price Discovery And Its Consequences

In Part 1 we noted that the real evil of Bubble Finance is not merely that it leads to bubble crashes, of which there is surely a doozy just around the bend; or that speculators get the painful deserts they fully deserve, which is coming big time, too; or even that the retail homegamers are always drawn into the slaughter at the very end, as is playing out in spades once again. Daily.

Given enough time, in fact, markets do bounce back because capitalism has a inherent urge to grow, thereby generating higher output, incomes, profits, wealth and stock indices. That means, in turn, investors eventually do recover from bubble crashes—notwithstanding the tendency of homegamers and professional speculators alike to sell at panic lows and jump back in after most of the profits have been made—or even at panic highs like the present.

Instead, the real economic iniquity of central bank driven Bubble Finance is that it destroys all the pricing signals that are essential to financial discipline on both ends of the Acela Corridor. And as quaint at it may sound, discipline is the sine qua non of long-term stability and sustainable gains in productivity, living standards and real wealth.

The pols of the Imperial City should be petrified, therefore, by the prospect of borrowing $1.2 trillion during the upcoming fiscal year (FY 2019) at a rate of 6.o% of GDP during month #111 through month #123 of the business expansion; and doing so at the very time the central bank is pivoting to an unprecedented spell of QT (quantitative tightening), involving the disgorgement of up to $2 trillion of its elephantine balance sheet back into the bond market.

Even as a matter of economics 101, the forthcoming $1.8 trillion of combined bond supply from the sales of the US Treasury ($1.2 trillion) and the QT-disgorgement of the Fed ($600 billion) is self-evidently enough to monkey-hammer the existing supply/demand balances, and thereby send yields soaring.

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

Measuring The Equity Bubble – “You Are Here”

On best revisions for GDP and earnings in 2018 after Tax reform, the S&P is now less expensive than before, at just 57% above historical average…

https://www.zerohedge.com/sites/default/files/inline-images/20180118_PEG1.jpg

In this brief note, we wanted to update our value indicator for the S&P, after the steep consensus upgrades to US earnings and US GDP that followed the US tax reform.

We assess how big of an improvement should we see after the reform, assuming a GDP growth of 3.40% in 2018, which is the average of the 10 highest analysts’ forecasts surveyed by Bloomberg, and assuming a 26% jump in earnings in 2018, again at the top end of surveys. We conclude that, against such most generous estimates, the ‘Peak PEG’ ratio for the S&P improved by almost 10%, or, rephrased, it is almost 10% off peak.

It follows that the S&P is now above historical averages by a mere 57%.

The Peak PEG ratio, using Peak Earnings and Trend Growth

The ‘Peak PEG’ ratio is a variation of the Shiller P/E and the Hussman P/E indicators. It measures the price-earnings to growth ratio (PEG ratio) not for a single stock but for the market as a whole. The ‘Peak PEG ratio’ is a price to peak-earnings multiple, adjusted for long-run trend growth. It considers the highest (rather than average) earnings over the previous 10 years (top 2 quarters on the last 40) and then divides for growth potential. It uses top earnings so to conservatively assume the best profit generation capability for stocks in a decade to persist, thus defusing a common critic to the Shiller P/E. It uses GDP trend growth so to proxy earnings growth potential, which is highly correlated to it over time.

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

Loonie Tumbles After Dovish Bank of Canada Hikes By 25bps, Warns Of NAFTA Uncertainty

As expected by a broad majority of economists, the Bank of Canada just hiked its overnight rate by 25bps to 1.25%, the first hike by a G-7 central bank in 2018.

In raising the rate, the BoC said that “recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity” however in a dovish twist the BOC added that “as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.

From the bank’s forecasts:

In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.

The central bank also sees the following key indicators:

CPI Inflation Y/Y:

  • 2017 Q2:1.3%, last 1.3%
  • 2017 Q3:1.4%, last 1.4%
  • 2017 Q4:1.8%, last 1.4%
  • 2018 Q1:1.7%

Real GDP Y/Y:

  • 2017 Q2:3.6%, last 3.7%
  • 2017 Q3:3.0%, last 3.1%
  • 2017 Q4:3.0%, last 3.1%
  • 2018 Q1:2.7%

However, what appears to have spooked traders is the general dovish context of the statement:

Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank’s outlook takes into account a small benefit to Canada’s economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.

As a result of the unexpected dovish addition, while the loonie initially kneejerked higher, it has since given up all gains and is now near the lows of the day.

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

What Has QE Wrought?

What Has QE Wrought?

bubbles_1.PNG

[Editor’s Note: Watch Ron Paul deliver this Special Report here.​]

The Great Recession began in 2007. It didn’t take long for the money managers to recognize its severity, and that a little tinkering with interest rates would not suffice in dealing with the economic downturn. In Dec. 2008, the first of four Quantitative Easing programs began which did not end until Dec. 18, 2013. Some very serious consequences of this policy of unprecedented credit creation have set the stage for a major monetary reform of the fiat dollar system. The dollar’s status as the reserve currency of the world will continue to be undermined. This is not a minor matter. As our financial system unravels, the seriousness of it will become evident to all, as the need to pay for our extravagance becomes obvious. This will make the country much poorer, though the elite class that manages such affairs will suffer the least.

By the time the QE’s ended, the Central banks of the world had increased their balance sheet by $8.3 trillion, with only $2.1 trillion worth of GDP growth to show for it. This left $6.2 trillion of excess liquidity in the banking system that did not go where the economic planners had hoped. Central banks now own $9.7 trillion of negative interest yielding bonds. The financial system has been left with a bubble mania, financed by artificial credit and unsustainable debt. The national debt in 2007 was $8.9 trillion; today it’s $20.5 trillion. Rising interest rates will come and that will be deadly for the economy and the Federal budget.

This inflationary policy is generated by the belief that there is no benefit in allowing the needed economic correction to the problems generated by the Fed to occur. The correction is what the market requires, not the resumption and acceleration of the dangerous inflationary policy that caused the bubble economy.

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

Will the World Economy Continue to “Roll Along” in 2018?

Will the World Economy Continue to “Roll Along” in 2018?

Once upon a time, we worried about oil and other energy. Now, a song from 1930 seems to be appropriate:

Today, we have a surplus of oil, which we are trying to use up. That never happened before, or did it? Well, actually, it did, back around 1930. As most of us remember, that was not a pleasant time. It was during the Great Depression.

Figure 1. US ending stocks of crude oil, excluding the Strategic Petroleum Reserve. Amounts will include crude oil in pipelines and in “tank farms,” awaiting processing. Businesses normally do not hold more crude oil than they need in the immediate future, because holding this excess inventory has a cost involved. Figure produced by EIA. Amounts through early 2016.

A surplus of a major energy commodity is a sign of economic illness; the economy is not balancing itself correctly. Energy supplies are available for use, but the economy is not adequately utilizing them. It is a sign that something is seriously wrong in the economy–perhaps too much wage disparity.

Figure 3. U. S. Income Shares of Top 10% and Top 1%, Wikipedia exhibit by Piketty and Saez.

If wages are relatively equal, it is possible for even the poorest citizens of the economy to be able to buy necessary goods and services. Things like food, homes, and transportation become affordable by all. It is easy for “Demand” and “Supply” to balance out, because a very large share of the population has wages that are adequate to buy the goods and services created by the economy.

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

Is the High Level of Debt a Major Economic Risk Factor?

Many economic commentators regard high level of debt relative to GDP as a major risk factor as far as economic health is concerned. This way of thinking has its origins in the writings of the famous American economist Irving Fisher. According to Irving Fisher,[1] a high level of debt relative to GDP runs the risk of setting in motion deflation and in turn a severe economic slump. On this way of thinking, the high level of debt sets in motion the following sequence of events that culminate in a severe economic slump.

Stage 1: The debt liquidation process is set in motion because of some random shock. For instance a sudden large fall in the stock market. The act of debt liquidation forces individuals into distressed selling of assets.

Stage 2: Because of the debt liquidation, the money stock starts shrinking and this in turn slows down the velocity of money.

Stage 3: A fall in money leads to a decline in the price level.

Stage 4: The value of people’s assets falls whilst the value of their liabilities remains intact. This results in a fall in the net worth, which precipitates bankruptcies.

Stage 5: Profits start to decline and losses emerge.

Stage 6: Production, trade and employment are curtailed.

Stage7:  All this leads to growing pessimism and a loss of confidence.

Stage 8: This in turn leads to the hoarding of money and a further slowing in the velocity of money.

Stage 9: Nominal interest rates fall, however, because of a fall in prices real interest rates rise.

Note that the critical stage in this story is the stage 2 i.e. debt liquidation results in a decline in the money stock. However, why should debt liquidation cause a decline in the money stock?

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

Credit Card Debt Hits All Time High As Consumers Unleash Historic Shopping Spree

It’s official: the reason behind the recent rebound in the economy can be explained with two words: “charge it.”

Readers may recall that one month ago, we reported that with Republicans in Washington on the verge of passing their first major piece of legislation in the form of comprehensive tax cuts that will allow Americans across the income spectrum to keep a little more of their hard earned cash in 2018, it appeared that U.S. consumers already “pre-spent” their savings using their credit cards.

And now we have confirmation that this is precisely what happened, because in the month of November, between revolving, or credit card, and non-revolving debt, largely student and auto loans, according to the latest Fed data, total consumer debt rose by $28 billion, or the most since November 2001, to $3.827 trillion, an annualized increase of 8.8%, or roughly 4 times faster than the pace of overall GDP growth.

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Broken down, consumer credit rose by $11.2 billion in revolving credit, or credit card debt, which pushed it a record $1.023 trillion, the highest credit card amount outstanding on record. This was also the second highest monthly increase in credit card debt on record.

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Meanwhile, non-revolving credit – or auto and student loans – rose by $16.8 trillion to $2.805 trillion. Nonrevolving lending to consumers by the Federal government, which is mainly student loans, rose to $1.142t, on a non-seasonally adjusted basis.

This was to be expected: as we showed last month, US consumers appear to be tapping out, and as a result the Personal savings rate dropped to 2.9%, the lowest since November 2007.

So, in addition to all the usual holiday trinkets that US consumers buy year after year, what hot new Christmas gadget has Americans suddenly willing to max out their credit cards?  Well, if Google search trends are any clue, it might not be a gadget, or anything tangible for that matter, at all.

Global Debt Hits Record $233 Trillion, Up $16Tn In 9 Months

Last June we reported  that according to the Institute of International Finance – perhaps best known for its periodic and concerning reports summarizing global leverage statistics – as of the end of 2016, in a period of so-called “coordinated growth”, global debt hit a new all time high of $217 trillion, over 327% of global GDP, and up $50 trillion over the past decade.

Six months later, on January 4, 2018, the IIF has released its latest global debt analysis, which reported that global debt rose to a record $233 trillion at the end of Q3 of 2017 between $63Tn in government, $58Tn in financial, $68TN in non-financial and $44Tn in household sectors, an total increase of $16 trillion increase in just 9 months.

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According to the IIF, private non-financial sector debt hit all-time highs in Canada, France, Hong Kong, South Korea, Switzerland and Turkey.

And yet, largely as a result of the ongoing Chinese crackdown on shadow banking, even as global debt rose to new record highs, the ratio of debt-to-GDP fell for the fourth consecutive quarter as economic growth accelerated. The ratio is now around 318%, nearly 10% below the high set in the first quarter of 2017.

In the annual report, the IIF notes that “a combination of factors including synchronized above-potential global growth, rising inflation (China, Turkey), and efforts to prevent a destabilizing build-up of debt (China, Canada) have all contributed to the decline.”

Still, while global GDP has enjoyed a period of accelerating growth, this may soon come to an end even as debt levels continue to rise. Meanwhile, the debt pile could act as a brake on central banks trying to raise interest rates, given worries about the debt servicing capacity of highly indebted firms and government, the IIF analysts wrote.

And speaking of rates in 2018, the IIF pointed out that after several years of forecasters reducing their year-end rate predictions, 2018 is the first year in many when “for a change” forecasters are predicting a rebound in interest rates.  Maybe this is the one year when “experts” will finally be right when it comes to interest rates.

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The Debt Beneath

The Debt Beneath

Debt is irrelevant and matters not. It’s different this time. That’s the message from politicians, markets and participants. Tax cuts pay for themselves (they do not), leverage doesn’t matter (it does) and the increased costs of servicing the debt as a result of rising rates will be offset by imaginary real wage growth to come (they won’t). But the calmest market waters in history continue to keep these illusions alive as asset prices keep levitating from record to record.

Debt does matter and it was ironically left to Janet Yellen to voice any remnant concerns about the sustainability of debt to GDP: “It’s the type of thing that should keep people awake at nightshe said.

With good reason:

After all the debt burden has never been higher and rates, following years of enabling the largest debt expansion in human history, are starting to rise in the US. In the larger historic context rates are still low, but let’s be clear, they are rising:

And with rising rates come questions of the sustainability of servicing incredibly high debt loads.

The worldwide equity rally since the early 2016 lows has resulted in a massive increase in the market capitalization of global asset prices which have increased by over $25 trillion in value since then. As discussed in my 2017 Market Lessons US market capitalization is now north of 143% of US GDP.

Low rates and free money in form of global QE and now US tax cuts make it all possible and consequence free. But is it?

Let’s take a look at the leveraging game over the past 2 years since this is when the most recent rally began. And note in many cases we don’t have full 2017 data yet so I’m using the running 2 year data where I can pull it. The trend is the same: Up, up and away.

…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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