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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 Fed’s “Inflation Target” is Impoverishing American Workers

Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.

Fed Chair Jerome Powell apparently does not see the pernicious effects of inflation (at least he seems to be looking around… [PT]) Photo credit: Andrew Harrer / Bloomberg

Naturally, the Fed and all other central bankers prefer the definition of inflation as a rise in prices which insidiously hides the fact that they, being the issuers of currency, are the real culprit for increased prices.

Be that as it may, the common understanding of inflation as rising prices has always been seen as pernicious and destructive to an economy and living standards.  In the perverted world of modern economics, however, the idea of inflation as an intrinsic evil has been turned on its head and monetary authorities the world over now have “inflation targets” which they hope to attain.

America’s central bank is right in line with this lunacy. According to the Fed’s “May minutes”, it wants

Translated into understandable verbiage, the Fed wants everyone to pay at least 2% higher prices p.a. for the goods they buy.

Yes, by some crazed thinking US monetary officials believe that consumers paying higher prices is somehow good for economic activity and standards of living!  Of course, anyone with a modicum of sense can see that this is absurd and that those who espouse such policy should be laughed at and summarily locked up in an asylum!  Yet, this is now standard policy, not just with the Fed, but with the ECU and other central banks.

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

America’s Debt Dependence Makes It An Easy Economic Target

America’s Debt Dependence Makes It An Easy Economic Target

There is a classic denial tactic that many people use when confronted with negative facts about a subject they have a personal attachment to; I would call it “deferral denial” — or a psychological postponing of reality.

For example, point out the fundamentals on the U.S. economy such as the fact that unemployment is not below 4% as official numbers suggest, but actually closer to 20% when you factor in U-6 measurements including the record 96 million people not counted because they have run out of unemployment benefits. Or point out that true consumer inflation in the U.S. is not around 3% as the Federal Reserve and the Bureau of Labor Statistics claims, but closer to 10% according to the way CPI used to be calculated before the government started rigging the numbers.  For a large part of the public including a lot of economic analysts, there is perhaps a momentary acceptance of the danger, but then an immediate deferral — “Well, maybe things will get worse down the road, 10 or 20 years from now, but it’s not that bad today…”

This is cognitive dissonance at its finest. The economy is in steep decline now, but the mind in denial says “it could be worse,” and this is how you get entire populations caught completely off guard by a financial crash. They could have easily seen the signs, but they desperately wanted to believe that all bad things happen in some illusory future, not today.

There is also another denial tactic I see often in the world of politics and economics, which is what I call “paying it backward.” This is what people do when they have a biased attachment to a person or institution and refuse to see the terrible implications of their actions.

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

What’s Going On with Trucking and Rail?

What’s Going On with Trucking and Rail?

Everything is spiking, setting off “inflationary concerns.”

When consumer products companies, retailers, oil-and-gas drillers, manufacturers, and other companies complain that shipping goods within the US is confronting them with soaring costs, capacity constraints, and delays, they’re not making this up. Trucking companies and railroads – an infamously cyclical industry that suffered through the “transportation recession” from 2015 through much of 2016 – are jacking up their prices with gusto.

The total amount that shippers spent on freight by truck, rail, barge, and air is skyrocketing, according to the Cass Freight Expenditure Index, which tracks the amounts spent by shippers on all modes of transportation. This spending is a function of price and volume. In May, soaring prices and shipping volume pushed spending up by 17.3% compared to a year ago, the 8th double-digit year-over-year increase in a row:

“May’s 17.3% increase clearly signals that capacity is tight, demand is strong, and shippers are willing to pay up for services to get goods delivered in all major modes throughout the transportation industry,” the Cass report said.

And the rising price of fuel and the related fuel surcharges added to the amounts spent: the price of diesel was up 27% at the end of May from a year ago.

The Cass Truckload Linehaul Index, which tracks per-mile full-truckload pricing but does not include fuel or fuel surcharges and is not impacted by rising diesel prices, jumped 9.0% in May compared to a year ago, the largest year-over-year increase in the data going back to 2005. And “the strength is continuing to accelerate,” Cass said in its Linehaul report:

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

The Real Economic Numbers: 21.5 Percent Unemployment, 10 Percent Inflation And Negative Economic Growth

The Real Economic Numbers: 21.5 Percent Unemployment, 10 Percent Inflation And Negative Economic Growth

Every time the mainstream media touts some “wonderful new economic numbers” I just want to cringe.  Yes, it is true that the economic numbers have gotten slightly better since Donald Trump entered the White House, but the rosy economic picture that the mainstream media is constantly painting for all of us is completely absurd.  As you are about to see, if honest numbers were being used all of our major economic numbers would be absolutely terrible.  Of course we can hope for a major economic turnaround for America under Donald Trump, but we certainly are not there yet.  Economist John Williams of shadowstats.com has been tracking what our key economic numbers would look like if honest numbers were being used for many years, and he has gained a sterling reputation for being accurate.  And according to him, it looks like the U.S. economy has been in a recession and/or depression for a very long time.

Let’s start by talking about unemployment.  We are being told that the unemployment rate in the United States is currently “3.8 percent”, which would be the lowest that it has been “in nearly 50 years”.

To support this claim, the mainstream media endlessly runs articles declaring how wonderful everything is.  For example, the following is from a recent New York Times article entitled “We Ran Out of Words to Describe How Good the Jobs Numbers Are”

The real question in analyzing the May jobs numbers released Friday is whether there are enough synonyms for “good” in an online thesaurus to describe them adequately.

So, for example, “splendid” and “excellent” fit the bill. Those are the kinds of terms that are appropriate when the United States economy adds 223,000 jobs in a month, despite being nine years into an expansion, and when the unemployment rate falls to 3.8 percent, a new 18-year low.

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

The Dollar’s Purchasing Power Drops 2.9% in May from Year Ago, Fastest Drop since Nov 2011

The Dollar’s Purchasing Power Drops 2.9% in May from Year Ago, Fastest Drop since Nov 2011

Even as “hedonic quality adjustments” perform miracles to repress surging new and used vehicle inflation.

Consumer price inflation, as measured by the Consumer Price Index, released this morning by the Bureau of Labor Statistics, jumped by 2.8% in May from a year ago, after having already jumped by 2.5% in April. It was the fastest year-over-year rise since February 2012:

Inflation is just a nice way of saying that the dollar is losing its purchasing power, and that income earned in dollars is buying less and less, an experience consumers go through when they buy stuff. The purchasing power of the dollar dropped 2.93% in May from a year ago, the fastest drop since November 2011. The chart below shows the index of the dollar’s swooning purchasing power:

The CPI without food and energy rose 2.24% from a year ago, after having already risen 2.14% in April.

These year-over-year percentage changes in the Consumer Price Index are slower than what consumers experience in terms of actual price increases. Here are two big examples of how this discrepancy is happening: prices of used vehicles and new vehicles.

The CPI for used cars and trucks fell 1.7% in May from a year ago (not seasonally adjusted), according to the BLS. This index has been falling much of the time during the last decade with exception of the “Cash for Clunkers” period and its consequences, which took a whole generation of often perfectly good older cars off the road, and thus actually raised prices on what was left (the spike in this chart from 2010-2012):

The chart below shows the actual index of used car- and truck-price inflation over the decades. Note that this CPI for used vehicles in May is at the same level as in 1994:

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

Ronald Stoeferle: Gold Is Dirt Cheap Right Now

And a new bull market for the metal is beginning
Fresh from releasing his exhaustive 230-page annual report titled In Gold We Trust, Ronald Stoerferle joins us to summarize his forecast for the yellow metal.

Stoerferle, an author of several books on Austrian economics and head of strategy and portfolio management at Incrementum AG, concludes that gold is extremely cheap right now in dollar terms. And he sees a new bull market beginning for the precious metal — one likely to quickly build momentum as the next (and long overdue) financial market correction arrives.

We’re at the beginning of a new stage of a bull market.

We’ve seen a massive correction with a big drawdown, but we’re now seeing the Commitment of Traders report suggesting that there’s been a washout. We’re seeing that sentiment is really negative. We’re seeing that nobody really cares about gold and mining stocks, and especially about silver. Silver is probably the biggest contrarian investment, though silver mining stocks are probably even more contrarian at the moment.

We all know that the herd behavior in the sector is getting more extreme. I think it has got to do with career risk in the financial industry, so nobody really wants to make a contrarian call. But once we go above this $1,360-$1,380 resistance, which is also the neckline of a large inverse head & shoulder formation, I think gold will hit $1,500, $1,600 pretty quickly.

The most important thing is: in comparison to all the monetary printing that we’ve seen in the last couple of years, gold got significantly cheaper. Gold, in monetary terms, is dirt cheap at the moment. We’re basically at the same levels like in 1971 when it comes to the gold backing of the US dollar. So gold is a bargain at this level.

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

Is the U.S. in a depression? (How John Williams became America’s most important statistician)

Is the U.S. in a depression? (How John Williams became America’s most important statistician)

America’s economy has been progressing steadily. First quarter real GDP growth came in 2.2%. The official unemployment rate is 3.8%. Inflation, according to the Fed’s preferred measure is 2%.

But how accurate are those numbers?

“Nonsensical,” says John Williams, founder of Shadow Government Statistics, who has been tracking U.S. government data for more than three decades.

Williams reckons that, using traditional calculation methodologies, true inflation is likely running above 6% and the unemployment rate over 20%.

Most importantly, Williams’ calculations suggest that the US economy has been in a two decade-long depression. His line of reasoning is worth a look.

Underestimating inflation

Williams argues that U.S. statistical agencies overestimate GDP data by underestimating the inflation deflator they use in the calculation.

Manipulating the inflation rate, Williams argues in Public Comment on Inflation Measurement , also enables the US government to pay out pensioners less than they were promised, by fudging cost of living adjustments.

This manipulation has ironically taken place quite openly over decades, as successive Republican and Democratic administrations made “improvements” in the way they calculated the data.

These adjustments (such as hedonic adjustments to inflation calculations, or not counting people who have stopped looking for work as part of the labor force) inevitably cast the government’s numbers in a more favorable light.

However, mainstream media journalists tend to have a poor grasp of mathematics. They were thus unable to grasp the depth of the problem, let alone explain the issues to the public.

Politicians have thus been able to fudge economic data openly. For example, the chart below shows U.S. GDP growth as measured by official sources.

The following chart (produced by Williams) shows GDP growth as calculated using a GDP deflator, corrected for an approximately two percentage point understatement.

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

The Federal Reserve’s Shell Game

The Federal Reserve’s Shell Game

Inflation, wealth redistribution, and the subtle art of misdirection

The Federal Reserve is a key component of the US government’s wealth redistribution apparatus. Under the guise of “macroeconomic management,” it redistributes vast amounts of wealth on an ongoing basis through inflation. The victims of these transfers are ordinary Americans. The beneficiaries are the government and its elite cronies.

The Fed masks the nature of this surreptitious taxation and corporate welfare by performing a simple shell game that is just complicated enough to confound the general public.

First, let’s imagine the government performing this kind of inflationary transfer without the shell game.

Let There Be Money

Imagine Uncle Sam sitting at a desk, representing the Federal government. His right hand is the Treasury. It has the government’s main bank account, represented by a ledger on the desk. Uncle Sam also has revenue collecting powers, represented by a gun resting on the desk, which he uses to extort taxes from the public. Whenever he confiscates money, the cash balances of the public decline, and Uncle Sam’s ledger increases by the same amount.

As the God of the Bible could say, “Let there be light” (in Latin, fiat lux) and it was so, the State can say, “Let there be money” (fiat pecunia) and it is so.

Now let’s say Uncle Sam wants to raise $200 million for current expenditures: bureaucrat salaries, weapons purchases, welfare payments, etc. The problem is, the public has a limited tolerance for overt taxation. So, at a certain point, if Uncle Sam simply gestures to his gun again to levy the funds, he might face a tax revolt.

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

 

Argentina Bailed Out With Biggest Ever Loan In IMF History

Just a few weeks after Argentina became ground zero for the coming Emerging Market crisis, when its currency suddenly collapsed at the end of April amid soaring inflation, exploding capital outflows and a central bank that was far behind the curve (as in “13% of rate hikes in a week” behind)…

… the IMF has officially bailed out the country – again – this time with a $50 billion, 36-month stand-by loan, and coming in about $10 billion more than rumored earlier in the week, it was the largest ever bailout loan in IMF history, meant to help restore investor confidence in a nation that, between its soaring external debt and current account deficit, prompted JPMorgan to suggest that along with Turkey, Argentina is in effect, doomed.

As the JPM chart below shows, the country’s total budget deficit, which includes interest payments on debt, was 6.5% of GDP last year, much of reflecting a debt binge of about $100 billion over the last two and a half years. The primary fiscal deficit in 2017 was 3.9%.

The loan will have a minimum interest rate of 1.96% rising as high as 4.96%.

“We are convinced that we’re on the right path, that we’ve avoided a crisis,” Finance Minister Nicolás Dujovne said at a press conference in Buenos Aires. “This is aimed at building a normal economy.”

Dujovne said that about $15 billion from the credit line would be immediately available to Argentina after the package is approved by the IMF’s board, which is expected on June 20. The rest would be dispersed as needed as Argentina meets its targets.

Shortly after the news the loan was finalized, Dujovne made some additional, more bizarre comments, saying that “the amount we received is 11 times Argentina’s quota, which reflects the international community´s support of Argentina,” almost as if he was proud at just how insolvent his country “suddenly” become.

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

Good as gold: Turkey uses bullion to stabilise its economy

Commercial banks are putting gold into Turkey’s central bank to help deal with rapid inflation

Turkey’s central bank has accumulated an additional 400 metric tonnes of gold since 2011 (Reuters)
Turkey’s economy has been in a tailspin with an inflationary currency, but the country is using something rare to help stabilise itself: gold.

In late 2011, Turkey started to allow commercial banks to use gold instead of the Turkish lira for their required deposits at the central bank. These deposits are known as reserve requirements and help ensure that the banks are capitalised.

Over the past six-or-so years, Turkey’s central bank has accumulated an additional 400 metric tonnes of gold. That’s a lot of yellow bricks – more than what Britain has – and the sizeable stash has the possibility to take the edge off the crisis.

To put the Turkish gold haul in perspective, there are 10 million ounces of gold – roughly 311 tonnes – at the Bank of England, according to the New York-based financial consulting firm CPM Group.

The burgeoning balance of bullion comes as the result of a change in banking rules made earlier this decade.

I thought the Turkish thing was pure genius

– Jeff Christian, CPM Group

“I thought the Turkish thing was pure genius,” says Jeff Christian, founder of CPM Group. “It was using gold in the way that you should use it.”

In the simplest terms, the tweak to the rules allows gold to be used as a financial asset by the banks. In addition, the new regulation helped flush out a lot of gold that was previously held privately.

“This change allowed the government to get hold of the under-the-mattress gold to help stabilise the banks and the underlying economy,” says Ivo Pezzuto, professor of global economics, entrepreneurship, and disruptive innovation at the International School of Management, Paris, France.

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

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The Relevance of Hayek’s Triangle Today

Most of us are aware of the inflationary pressures in the major economies, that so far are proving somewhat latent in the non-financial sector. But some central banks are on the alert as well, notably the Federal Reserve Board, which has taken the lead in trying to normalise interest rates. Others, such as the European Central Bank, the Bank of Japan and the Bank of England are yet to be convinced that price inflation is a potential problem.

Virtually no one in the central banks, government treasury departments, or independent analysts see the real inflationary danger. There is a lone exception perhaps in Dr Zhang Weiying, the top economist at Beijing University and formally in charge of China’s economic policy, who quoted Hayek’s business cycle theory to point out the dangers of excessive deficits.[i] Whether he is listened to by his colleagues, we shall doubtless find out in due course. Otherwise, a sudden acceleration of price inflation will come as a complete surprise to our financially sophisticated markets.

This article explains why the danger lies in the structure of production, which in the West at least is seriously out of whack. The follies of post-crisis central bank monetary reflation are likely to drive us rapidly into the next credit crisis as a consequence. To understand why this is so requires us to revisit the 1930s writings of an Austrian-born economist, who was tasked by the London School of Economics with explaining to advanced students the disruption to the production process from changes in consumer demand.

Friedrich von Hayek was famously reported as the economic guru of both Margaret Thatcher and Ronald Reagan. This distinction owes its origin to his market-based approach to economics, which was in stark contrast with the statist approach that was predominant in political circles at that time, and still is today. It was simple shorthand for the media writing for a mass audience.

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

Burrito Index Update: Burrito Cost Triples, Official Inflation Up 43% from 2001

Burrito Index Update: Burrito Cost Triples, Official Inflation Up 43% from 2001

Welcome to debt-serfdom, the only possible output of the soaring cost of living.

Long-time readers may recall the Burrito Index, my real-world measure of inflation. The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016). The Burrito Index tracks the cost of a regular burrito since 2001. Since we keep detailed records of expenses (a necessity if you’re a self-employed free-lance writer), I can track the cost of a regular burrito at our favorite taco truck with great accuracy: the cost of a regular burrito has gone up from $2.50 in 2001 to $5 in 2010 to $6.50 in 2016.

It’s time for an update: the cost of a regular burrito has now reached $7.50, triple the 2001 cost. That’s a 200% increase in 17 years. According to the federal government, inflation since 2001 has risen about 40%: what $1 bought in 2001 now costs $1.43, according to the BLS Inflation calculator.

The Burrito Index is five times the official inflation rate. As I noted in The Disaster of Inflation–For the Bottom 95% (October 28, 2016) and Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs (May 25, 2017), the gross under-reporting of inflation (i.e. the loss of purchasing power of “money” and labor) is only part of the distortion: some of the populace is protected by subsidies from the real ravages of inflation, while those exposed to the unsubsidized real-world costs are being savaged by supposedly benign inflation.

Lest you reckon only burritos have tripled in cost since 2001–have you checked out college tuition or rents lately? Consider a typical public university:

University of California at Davis:
2004 in-state tuition $5,684
2018 in state tuition $14,463

So tuition at a state university soared 2.5 times while official inflation rose by a mere 35% since 2004. If UCD tuition had only risen by 35%, it would total $7,673, not $14,463. The cost above and beyond what we would expect had tuition tracked official inflation adds up to $27,000 per four-year bachelor’s degree per student.

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

America’s long-term challenge #3: destruction of the currency

America’s long-term challenge #3: destruction of the currency

On April 2, 1792, George Washington signed into law what’s commonly referred to as the Mint and Coinage Act.

It was one of the first major pieces of legislation in the young country’s history… and it was an important one, because it formally created the United States dollar.

Under the Act, the US dollar was defined as a particular amount of copper, silver, or gold. It wasn’t just a piece of paper.

A $10 “eagle” coin, for example, was 16.04 grams of pure gold, whereas a 1 cent coin was 17.1 grams of copper.

The ratios between gold, silver, and copper were all fixed back then.

But if we apply today’s gold price of $1292 per troy ounce, we can see that the current value of the original dollar as defined by the Mint and Coinage Act of 1792 is roughly $66.75.

In other words, the dollar has lost 98.5% of its value since 1792.

What’s incredible about this constant, steady destruction of the currency is how subtle it is.

Few people seem to notice, because modern day central bankers try to “manage” inflation between 2% to 3% per year.

2% to 3% per year is pretty trivial. But it happens again the next year. And the year after that. And the year after that.

After a decade or so, it really starts to add up.

But there’s an important, other side of the equation: income.

Costs are clearly rising. And it’s fair to say that incomes have been rising too. But which one has risen more?

In 1982, back when I was a toddler, the price of a Ford Mustang was $6,572. Today the cheapest Mustang starts at $25,680 according to Ford’s website.

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

Debt Deflation Italian Style

New York – This week The IRA will be at the MBA Secondary Market Conference & Expo, as always held at the Marriott Marquis in Times Square.  The 8th floor reception and bar is where folks generally hang out.  Attendees should not miss the panel on mortgage servicing rights at 3:00 PM Monday.  We’ll give our impressions of this important conference in the next edition of The Institutional Risk Analyst.

Three takeaways from our meetings last week in Paris:  First, we heard Banque de France Governor Villeroy de Galhau confirm that the European Central Bank intends to continue reinvesting its portfolio of securities indefinitely.  This means continued low interest rates in Europe and, significantly, increasing monetary policy divergence between the EU and the US.

Second and following from the first point, the banking system in Europe remains extremely fragile, this despite happy talk from various bankers we met during the trip.  The fact of sustained quantitative easing by the ECB, however, is a tacit admission that the state must continue to tax savings in order to transfer value to debtors such as banks.  Overall, the ECB clearly does not believe that economic growth has reached sufficiently robust levels such that extraordinary policy steps should end.

Italian banks, for example, admit to bad loans equal to 14.5 percent of total loans. Double that number to capture the economic reality under so-called international accounting rules.  Italian banks have packaged and securitized non-performing loans (NPLs) to sell them to investors, supported by Italian government guarantees on senior tranches. These NPL deals are said to be popular with foreign hedge funds, yet this explicit state bailout of the banks illustrates the core fiscal problem facing Italy.

And third, the fact of agreement between the opposition parties in Italy means that the days of the Eurozone as we know it today may be numbered.

…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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