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“Virtually Everybody Knew This Was Coming”

Was it Turkey’s “executive presidency” and its unwillingness to hike rates in the face of soaring inflation? Or maybe the record global debt accumulated over the past decade? Maybe the artificially low interest rates? Or perhaps it was the pervasive current account deficits amid easy outside capital. How about the rapid slowdown in China, its escalating trade war with the US, and the Yuan devaluation? Or perhaps it’s just the rising US interest rates and global quantitative tightening soaking up billions in excess liquidity?

However one justifies the current emerging market crisis, one thing is clear “virtually everybody knew this was coming.

At least that’s the common theme according to SocGen’s Albert Edwards, who after an extended absence has returned, with a new note looking at the turmoil gripping the EM sector. It’s hardly new territory for the SocGen strategist, who prior to his current role, was most famous for his correct predictions and observations on the Asian Financial Crisis of 1997.

Fast forward some 21 years, when the veteran SocGen strategist believes the current turmoil boils down to two things: the Fed’s ongoing tightening – a point we discussed earlier this week in “Forget About Turkey: Asia Is The Elephant In The Room” – and China’s rapid devaluation. Turmoil, which as Nedbank noted previously, is about much more than just Turkey, which is merely the symptomatic “tip of the iceberg.”

Here’s Edwards’ take on where we stand:

Many commentators have thought for some time that Turkey was a macro-accident waiting to happen. But the key issue is not Turkey’s idiosyncratic macro problems. The unfolding crisis in EM is the direct result of Fed tightening and the strong dollar. The Fed always raises rates until something breaks.

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

Turkey Rules Out Capital Controls As Germany Says IMF Bailout “Would Be Helpful”

During this morning’s conference call organized by Citi, HSBC and other banks with “thousands”  of investors, Turkey’s Treasury and Finance Minister Berat Albayrak – the Jared Kushner of Turkey  – eased nerves when in an attempt to bolster confidence, said that capital controls were ruled out as a policy option for Turkey. As a reminder, capital controls are widely seen as the “worst case scenario” for Turkey as they could precipitate “self-fulfilling contagion”, and lead to broader capital flight from the EM space.

Albayrak also said that reining in inflation and narrowing the current-account deficit were policy priorities, although he provided no details on how we would do that absent raising interest rates – an outcome that Erdogan has decried as unlikely – with both an IMF bailout and capital controls off the table.

Discussing Turkey’s runaway inflation, Albayrak said the central bank alone wouldn’t be able to rein it in without tighter fiscal policy, although he has yet to provide any details on what options are on the table. In the meantime, GDP is set to slow further in the medium term from 7.4% expansion last year.

Still, after losing as much as a quarter of its value in the past few weeks after the U.S. sanctioned members of President Recep Tayyip Erdogan’s government, it continued to recover losses both before and after this morning conference call, rising to the highest level since last Friday, after Turkey cracked down on short sellers. Albayrak’s speech appears to have been successful, and the lira gained trading 4.0% stronger at 5.70 per dollar.

Meanwhile, as Albayrak was hoping to preserve some stability, a German government source told Reuters on Thursday that “the Federal Government believes that an IMF program could help Turkey.

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

Americans Live In A World Of Lies

Americans Live In A World Of Lies

The US government and the presstitutes that serve it continue to lie to us about everything. Today the Bureau of Labor Statistics told us that the unemployment rate was 3.9%. How can this be when the BLS also reports that the labor force participation rate has declined for a decade throughout the length of the alleged economic recovery and there is no upward pressure on wages from full employment. When jobs are plentiful, people enter the labor force to take advantage of the work opportunities. This raises the labor force participation rate. When employment is full—which is what a 3.9% unempoyment rate means—wages are bid up as employers compete for scarce labor. Full employment with no wage pressure and no rise in the labor force participation rate is impossible.

The 3.9% unemployment rate is not due to employment. It results from not counting discouraged workers who have ceased to search for jobs because there are no jobs to be had. If an unemployed person is not actively searching for a job, he is not counted as being in the labor force. The way the unemployment rate is measured makes it a hoax.

The government tells us that there is essentially no inflation despite the fact that prices have been rising strongly—the price of food, the price of home repairs, the price of drugs, the price of almost everything. Two years ago the American Association of Retired People’s Public Policy Institute reported that the average retail drug price has been increasing “at a worrying pace of 10 percent a year, and about 20 drugs have astoundingly had their prices quadruple since just December. Sixty drugs doubled over the same period. Turing Pharmaceuticals, headed by Martin Shkreli, is one of the most pronounced examples of this kind of behavior.

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

 

Gold Yuan Crypto

George Caleb Bingham The verdict of the people 1854
It’s been a while since we last heard from Dr. D, but here he’s back explaining why neither gold nor the yuan nor cryptocurrencies can or will replace the dollar as the reserve currency, but together they just might:

Dr. D: “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” –Ogden Nash

Over the last year or two there’s been discussion about the U.S. Federal spending moving beyond $4 TRILLION dollars, and whether a $1+ trillion dollar annual deficit, on top of a $20 Trillion national debt – Federal only – is sustainable. It isn’t.

“What can’t go on, doesn’t” is the famous quote of economist Herbert Stein. Since a spiraling deficit of $1 trillion deficit on a $20 trillion debt can’t go on, what will we replace it with when it very soon doesn’t? Historically gold. Whatever gold exists in the nation’s coffers, whether one coin or 8,000 tons, is used to as the national wealth, and fronted by paper to re-boot the currency. With some additions such as oil and real estate, this was the solution in Spain, France, Germany, and the Soviet Union among hundreds of fiat defaults. Why? Because at a time of broken promises — real goods, commodities that can be seen, touched, and used – are the tangible proof of wealth, requiring no trust, and from which the human trust system of paper and letters of credit can be rebuilt.

But in these complicated, digital times perhaps that’s too simplistic. Perhaps we have grown smarter than all our fathers and this time it will be different. Will it really be the same? Let’s look at how the system works now.

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

Here’s Why Rip-Roaring Inflation Is Inevitable

Here’s Why Rip-Roaring Inflation Is Inevitable

The stability of America’s status quo is illusory.

One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy. Millions of words have been written about this, and so some shortcuts will have to be taken to make sense of it in one essay.

Let’s start with the basics.

1. Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money. To keep it simple: say the economy of a country is $20 trillion. (Hey, the US GDP is $20 trillion…) Say its money supply is $10 trillion.

So banks and/or the government create $2 trillion in new money but the value of goods and services only expands by $1 trillion. the “extra” $1 trillion of newly created money (either “printed” or borrowed into existence) reduces the value of all existing money.

In effect, the new money robs purchasing power from all existing money.Those holding existing money have lost purchasing power while the recipients of the new money receive purchasing power they didn’t have prior to receiving the new money.

We can see how this works by looking at a chart of GDP to debt. As debt has soared (and remember, debt is “new money” that was loaned into existence), GDP has risen at a much lower rate, so the ratio of debt to GDP has skyrocketed. (see chart below)

2. Where “inflation” (higher prices for the same item) shows up depends on who gets the newly created money: the wealthy few or the wage-earning many. As I have explained many times, in our system, all newly issued money goes to banks, financiers and corporations–the super-wealthy few.

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

Can Deflation Undo the Damage of Inflation?

In our various writings, we have suggested that loose monetary policy of the central bank, which amounts to the lowering of interest rates and monetary pumping, gives rise to activities that cannot exist by themselves without the support from this loose monetary policy.

An increase in money supply as a result of an easy monetary stance by the central bank sets an exchange of nothing for something i.e. the diversion of real wealth from wealth generators towards activities that emerge on the back of loose monetary policy. We label various activities that emerge on the back of loose monetary policy as bubble activities. Given that these activities cannot support themselves, they constitute a burden on wealth generators.

It is tempting to suggest that a tighter monetary stance of the central bank could undo the negatives of the previous loose monetary stance i.e. inflationary policy through the removal of bubble activities. In fact, this type of policies carries a label of countercyclical policies.

On this way of thinking, whenever economic activity slows down it should be the duty of the central bank to give it a push, which will place the economy back on the trajectory of an expanding economic growth. The push is done by means of loose monetary policy i.e. the lowering of interest rates and raising the growth rate of money supply.

Conversely, when economic activity is perceived to be “too strong”, then in order to prevent an “overheating” it should be the duty of the central bank to “cool off” economic activity by a tighter monetary stance.

This amounts to raising interest rates and slowing down monetary injections. It is believed that a tighter stance will place the economy on a trajectory of stable non-inflationary growth. On this way of thinking, the economy is perceived to be like a space ship, which occasionally slips from the trajectory of stable economic growth.

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

Fed Sweeps Yield Curve Under the Rug – What Are They Trying to Hide?

Federal reserve and the yield curve

Fed Sweeps Yield Curve Under the Rug – What Are They Trying to Hide?

A few weeks ago we reported the Fed was getting hawkish despite what they were calling “low inflation.”

In that article, we showed rates possibly being raised more than 4 times in 2019. But more importantly, we warned that anyone investing in the market should start preparing to expect the unexpected.

And right now, it looks like the Fed’s bizarre moves are continuing.

This time it involves the yield curve. The yield curve represents the difference in interest rate paid on short-term Treasury notes and long-term Treasury notes in the bond market.

A common signal of economic health from the bond market involves looking at the difference between the 2-year and 10-year rates (also called the “spread”).

Over the last three decades, when 2-year yields are lower than the 10-year bond yields, it signaled a healthy economic outlook.

But when that “spread” shrinks, the yield curve is said to be flattening. If it “reverses” entirely, the yield curve is inverted (or negative).

Since 1980, an inverted yield curve preceded an economic recession with reliable accuracy (see graph below, red arrows point to 3 recent events):

us treasury yield

So the yield curve is a fairly reliable signal for imminent recession. And notice the downward trend of the yield curve on the right side of the graph. That indicates a flattening yield curve heading towards inversion.

And when we zoom in, the picture looks even more dire.

As of July 11th, 2018 the Treasury reported the difference between the 2-year and 10-year bonds to be 27 basis points (or .27% – see chart below).

This is the lowest spread since the 2008 Great Recession, and already much lower than the historical graph above.

us treasy yield

There is no doubt the yield curve is flattening, and at an alarming pace.

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

Spotlight Turkey: Hyperinflation and Mass-Migration Crisis Inevitable

Turkey isn’t close to hyperinflation yet. But the path it’s on is a guaranteed way to get there.

As Erdogan tightens his grip on finance and the central bank, Investors Fear Turkish Currency Crisis.

The Turkish lira fell around 4% against the dollar late Monday after Mr. Erdogan appointed his son-in-law as finance minister and put in place measures that could curb the independence of the country’s central bank. Investors also sold Turkish shares and debt, with yields on its dollar bond maturing in October 2028 rising from around 6.8% last week to about 7.15% recently, according to Tradeweb. Yields rise as prices fall.

“There’s a real risk that this spirals into a full-blown currency crisis,” said Paul McNamara, a portfolio manager at GAM Holding . “It’s got so many red flags that we’ve associated with economic crises…in the past.”

In such a crisis, a sharp slide in a currency threatens the government and local companies’ ability to pay foreign debt. Turkey has one of the highest levels of external debt for a developing country, at 53.4% of gross domestic product, according to data from the International Monetary Fund. Local companies have raised billions of dollars, leaving them and the wider economy vulnerable to a slide in the lira, which would make paying off that debt more expensive.

The lira has lost a fifth of its value this year as investors sold ahead of Mr. Erdogan’s June re-election, concerned he would erode the central bank’s independence and usher in looser monetary and fiscal policies. Mr. Erdogan has described high interest rates as “the mother and father of all evils,” stoking fears that his preference for lower rates could prevent the central bank from supporting the currency and tackling inflationary pressure.

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

Inflation Rearing Its Ugly Head

Inflation Rearing Its Ugly Head

The world of finance and investment, as always, faces many uncertainties. The US economy is booming, say some, and others warn that money supply growth has slowed, raising fears of impending deflation. We fret about the banks, with a well-known systemically-important European name in difficulties. We worry about the disintegration of the Eurozone, with record imbalances and a significant member, Italy, digging in its heels. China’s stock market, we are told, is now officially in bear market territory. Will others follow? But there is one thing that’s so far been widely ignored and that’s inflation.

More correctly, it is the officially recorded rate of increase in prices that’s been ignored. Inflation proper has already occurred through the expansion of the quantity of money and credit following the Lehman crisis ten years ago. The rate of expansion of money and credit has now slowed and that is what now causes concern to the monetarists. But it is what happens to prices that should concern us, because an increase in price inflation violates the stated targets of the Fed. An increase in the general level of prices is confirmation that the purchasing power of a currency is sliding.

According to the official inflation rate, the US’s CPI-U, it is already running significantly above target at 2.8% as of May. Oil prices are rising. Brent (which my colleague Stefan Wieler tells me sets gasoline and diesel prices) is now nearly $80 a barrel. That has risen 62% since last June. If the US economy continues to grow the Fed will have to put up interest rates to slow things down. If it doesn’t, as money-supply followers fear, the Fed may still be forced to put up interest rates to contain price inflation.

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

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

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

Peters

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

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

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

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

Does Economic Growth Cause Inflation?

Most experts are of the view that as the economy gains strength the Fed must step in at some stage and introduce a tighter stance in order to prevent the rate of inflation getting out of control.

Why however, should economic growth be positively associated with a general increase in the prices of goods and services?

Let us examine how prices in general could go up. The price of a good is the amount of dollars paid per unit of this good.

Therefore, with all things being equal an increase in the quantity of dollars in the economy must lead to a general increase in the prices of goods and services.

Now, when we talk about economic growth what we mean by that is an increase in the production of goods and services that people require to support their life and wellbeing.

Obviously then, for a given amount of money an increase in economic growth i.e. an increase in the amount of goods and services, must lead to a decline and not to an increase in the prices of goods and services in general. (We now have more goods for an unchanged amount of dollars).

Therefore, if what we are saying is correct, why are the yearly growth rate of the consumer price index adjusted for food and energy (the core CPI) and the lagged yearly growth rate in industrial production are moving in tandem (see chart below)?

Does the positive correlation between the growth momentum of the core CPI and the lagged growth momentum of industrial production make sense?

Why should more wealth, which raises people’s living standards, also generate bad things – such as a general increase in prices of goods and services?

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

“Truly Awful Numbers”: Lira Tumbles After Turkish Inflation Explodes Most In 15 Years

Having stabilized modestly after its mid-June rout, which sent the Turkish Lira to a record low of 4.74 – on the re-election of president Erdogan of all things – overnight the TRY tumbled as much as 1.4% to 4.6813 after Turkey reported that headline inflation soared from +12.1%y/y in May to +15.4%y/y in June, significantly above the 13.9% y/y consensus expectations.

This was the worst inflation print since the runaway inflation days at the start of the century, and the highest since October 2003.

The monthly jump in inflation of 2.61%, was more than double the median Bloomberg estimate and higher than the highest est. of 1.8%.

As Goldman details, prices rose across the board: Food and nonalcoholic beverages inflation increased by 7.9pp to +18.9%yoy, on the back of a sharp rise in vegetable prices, and accounted for 1.8pp of the overall 3.3pp rise in the headline figure.

Core inflation also increased sharply, from +12.6%yoy in May to +14.6%yoy in June, above consensus expectations of +13.4%yoy. The rise in core inflation was broad-based with all major categories except education registering increases. Nevertheless, the sharp rises in the purchase of vehicle and telecommunication services categories were notable.

Understandable, currency traders were shocked at the print, which if anything is an underestimation of real price tendencies, and sent the Lira sliding to the lowest level against the USD since June 26.

In light of Erdogan’s recent comments, some of which have gone so far as suggesting the president may soon take over the rate-setting process himself making the Turkish Central Bank redundant, commentators were horrified at today’s data: commenting on the number, Medley Global EMEA analyst Nigel Rendell warned that “if policymakers react with only half-hearted measures, President Erdogan’s new term in office will quickly morph into a financial crisis”, quoted by Bloomberg.

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

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

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

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

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

PCE inflation

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

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

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

German inflation

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

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

Keynesian Economics Is an Artifact of Cheap Energy

Keynesian Economics Is an Artifact of Cheap Energy

Printing / borrowing money to generate the unsustainable illusion of “growth” sets up the collapse of the entire Keynesian edifice.
Of the many delusions of modern economics, perhaps the greatest is that the dominant Keynesian model reflects permanent dynamics of advanced economies. Economics, along with other social sciences, makes an implicit claim that its econometric claims are the equal of the “hard sciences” of physics and chemistry.
In other words, the econometrics of Keynesian economics is presented as possessing the same timeless validity of the natural sciences.
The reality is that Keynesianism arose in an era of abundant cheap energy, and it is an artifact of that brief one-off period in which industrialization, consumption and the human population were able to expand by leaps and bounds due to cheap energy and new technologies that leveraged greater value (“work,” output) from the cheap energy.
Once energy is no longer cheap or abundant, the Keynesian model of paying people to dig holes and fill them as a means of boosting “aggregate demand” falls apart. In the Keynesian model, “growth” as measured by consumption (gross domestic product) is assumed to be permanent and the highest goal of any economy.
If an economy starts contracting (i.e. recession), the one-size-fits-all solution in the Keynesian model is to boost consumption, i.e. “growth” by any means available: paying people to produce no useful output (building bridges to nowhere, etc.), distributing newly created money via “helicopter drops” into consumers’ laps via tax rebates, tax cuts, increased social welfare spending, etc.
This “solution” implicitly assumes the energy needed to fuel this unproductive labor, investment and consumption is permanently abundant and cheap. It also assumes that the quantity of energy available to fuel the economy will always expand, and as a result new currency (“money”) can be issued by central banks with few (if any) constraints.

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

Weekly Commentary: Performance Chase

Weekly Commentary: Performance Chase

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

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

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

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

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