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The End of (Artificial) Stability

The End of (Artificial) Stability

The central banks’/states’ power to maintain a permanent bull market in stocks and bonds is eroding.
There is nothing natural about the stability of the past 9 years. The bullish trends in risk assets are artificial constructs of central bank/state policies. As these policies are reduced or lose their effectiveness, the era of artificial stability is coming to a close.
The 9-year run of Bull-trend stability is ending as a result of a confluence of macro dynamics:
1. Central banks are under pressure to reduce, end or reverse their unprecedented monetary stimulus, and the consequences are unpredictable, given the market’s reliance on the certainty that “central banks have our back” is ending.
2. Interest rates / bond yields may well plummet in a global recession, but if we look at a 50-year chart of interest rates, we see a saucer-shaped bottoming in play. Technician Louise Yamada has been discussing the tendency of interest rates/bond yields to trace out a multi-year saucer bottom for over a decade, and we can now discern this.
Even if yields plummet in a recession, as many analysts predict, this doesn’t necessarily negate the longer term trend of higher yields and rates.
3. The global economy is overdue for a business-cycle recession, which is characterized by a retrenchment of credit and the default of marginal debt. The “recovery” is the weakest recovery in the past 60 years, and now it’s the longest expansion.
4. The mainstream financial media is telling us that everything is going great in the global economy, but this sort of complacent (or even euphoric) “it’s all good news” typically marks the top of stocks, just as universal negativity marks secular lows.
5. What happens to markets characterized by uncertainty? Once certainty is replaced by uncertainty, markets become fragile and thus exposed to sudden shifts of sentiment. This destabilization is expressed as volatility, but it’s far deeper than volatility as measured by VIX or sentiment indicators.

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

Money Manager: ‘The Chaos Coming To The Markets Is Here’

Money Manager: ‘The Chaos Coming To The Markets Is Here’

Money manager Michael Pento says that profound chaos surrounding the economy is coming. The insolvency is becoming clear, and soon, we will no longer be able to sweep the problem under the rug.

Sitting down with USA Watchdog’s Greg Hunter, Pento discussed the chaos people predicting in the markets and says that it’s already here. Pento is the author of the book titled The Coming Bond Market Collapse, as well as a financial expert and he says the media is lying when they say the economy is doing well.

“There are so many things that can go wrong with rising interest rates.  First of all, you have to understand that the permabulls that you hear on CNBC will tell you there is nothing wrong with rising interest rates.  It is a symbol of growth.  If you look at industrial production and retail sales for January, they were negative.  So, rising rates are occurring, not because of growth, they are caused by insolvency concerns.  That is the key metric here, and they are credit risks and insolvency concerns.”

“For the first time in 40 years, you are going to have bond prices and equity prices in free-fall. That happened in the 1970’s, but it’s going to be worse because in the 1970’s, you didn’t have an insolvency concern. . . The chaos coming to markets is here. It’s not going away, and it’s not going to be brushed under the rug. It’s not going to stay on the sidelines for another few years. The years from 2007 to 2017 were the years central banks were buying everything. There was no volatility, and stocks just went up. Those days have ended, and the volatility is only going to become much more profound.”

Hunter then asks Pento to explain who is insolvent.  The answer isn’t calming in the least.

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

“Strong Dollar,” “Weak Dollar,” What About a Gold-Backed Dollar?

“Strong Dollar,” “Weak Dollar,” What About a Gold-Backed Dollar?

gold backed dollar

The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronoucements and reversals which will take place in the coming months/years as the world’s reserve currency continues to be compromised.  So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.

The brief firestorm was set off by Treasury Secretary Steven Mnuchin who said in response to the dollar’s recent slide, “Obviously, a weaker dollar is good for us, it’s good because it has to do with trade and opportunities.”*  Mnuchin backtracked a bit as international financial leaders criticized the apparent shift in policy while Administration officials sought to clarify the Secretary’s remarks.  President Trump weighted in on the matter saying, “Ultimately, I want to see a strong dollar” and added that Mnuchin’s comments were “taken out of context.”

While President Trump sought to allay jittery currency markets that monetary policy had not changed, candidate Trump supported the Federal Reserve’s suppression of interest rates and did not want to see a rising dollar:

I must be honest, I’m a low interest rate

person.  If we raise rates and if the

dollar starts getting too strong, we’re going

to have some very major problems.**

Of course, the entire uproar about a strong dollar versus weak dollar is a sham. When the dollar (and for that matter all other national currencies) cannot be redeemed for either gold or silver, it is inherently “weak” and ultimately worthless.  That this obvious fact is not recognized by the Trump Administration, international monetary authorities, and the financial press demonstrates just how unstable the dollar and world currencies actually are.

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

Calm Before The Inflationary Storm

Calm Before The Inflationary Storm

The economy has been showing great gains, and that positive trend is fueling fears of a surge in inflation. The Consumer Price Index, the key predictor of inflationary trends, rose .05 percent in January, which greatly exceeded the anticipated rise of 0.2 percent. The market reacted as expected as stocks fell, and government bond yield rose.

The Fed is keeping a close eye on these developments, and that could fuel the inflation fears. The fear of rising prices includes most economic sectors, from gasoline, housing, food, healthcare, to clothing.

Predictably, the market reacted immediately to the CPI rise with a 100-point loss after opening, even though the decline was quickly reversed. Investors are anticipating that the Federal Reserve could raise their interest rates three or more times by year-end.

As the economy continues to grow, unemployment has fallen to a record low and the sale of tangible goods is up. Economists are anticipating the economic upswing to continue as the GDP is expected to grow by 3 percent, faster than anticipated. Since 2009, the GDP has only risen by an annual average of 2.2 percent. As a result, prices for consumer goods have risen predictably and steadily. The Federal Reserve is setting policy with a 2 percent inflation in mind. A higher-than-anticipated inflation rate could raise interest rates, making it more difficult for companies to borrow needed funds. Following the passage of a $300 billion spending package, market-watchers are now convinced of a 62 percent chance that the Feds will raise interest rates three times by December. Rate hikes in March and June are almost a certainty, with the third hike a high possibility. A fourth hike is not out of the question and becoming more likely. This is seen by many as the real problem.

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

Fed President Sounds Panic Over Level Of US Debt

Nearly a decade after the US unleashed its biggest debt-issuance binge in history, made possible only thanks to the Fed’s monetization of nearly $4 trillion in deficits (and debt issuance), the Fed is starting to get nervous about the (un)sustainability of the US debt.

The Federal Reserve should continue to raise U.S. interest rates this year in response to faster economic growth fueled by recent tax cuts as well as a stronger global economy, Dallas Federal Reserve Bank President Robert Kaplan said on Wednesday.

“I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018,” Kaplan said in an essay updating his views on the economic and policy outlook.

“History suggests that if the Fed waits too long to remove accommodation at this stage in the economic cycle, excesses and imbalances begin to build, and the Fed ultimately has to play catch-up.” The Fed is widely expected to raise rates three times this year, starting next month.

Kaplan, who does not vote on Fed policy this year but does participate in its regular rate-setting meetings, did not specify his preferred number of rate hikes for this year. But he warned Wednesday that falling behind the curve on rate hikes could make a recession more likely.

Echoing the recent Goldman analysis, warning that the recently implemented budget could lead to an “unsustainable” debt load, Kaplan – who previously worked for Goldman – also had some cautionary words about the Trump administration’s recent tax overhaul, which he said would help lift U.S. economic growth to 2.5% to 2.75% this year, pushing the U.S. unemployment rate, now at 4.1% down to 3.6% by the end of 2018.

On the all important issue of inflation, he projected it would firm this year on route to the Fed’s 2-percent goal.

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

Raising Interest Rates Is Like Starting a Fission Chain Reaction

Raising Interest Rates Is Like Starting a Fission Chain Reaction

Central bankers seem to think that adjusting interest rates is a nice little tool that they can easily handle. The problem is that higher interest rates affect the economy in many ways simultaneously. The lessons that seem to have been learned from past rate hikes may not be applicable today.

Furthermore, there can be quite a long time lag involved. Thus, by the time a central banker starts seeing an effect, it may be clear that the amount of the interest rate change is far too large.

A recent Zerohedge article seems to suggest that problems can arise with 10-year Treasury interest rates of less of than 3%. We may be facing a period of declining acceptable interest rates.

Figure 1. Chart from The Scariest Chart in the Market.

Let’s look at a few of the issues involved:

[1] The standard reason for raising interest rates seems to be concern about inflationary impacts occurring as a result of rising food and energy prices. In practice, the impact of such an interest rate change can be quite severe and quite delayed. 

Figure 2 is an illustration from the Bureau of Labor Statistics website showing one of today’s concerns: rising energy costs. Food prices are not yet rising. Normally, however, if oil prices rise, the cost of producing food will also rise. This happens because modern agricultural methods and transportation to markets both require the use of petroleum products.

Figure 2. Figure created by the US Bureau of Labor Statistics showing percentage change in the Consumer Price Index between January 2017 and January 2018, for selected categories.

In fact, raising short-term interest rates seems to have been associated with trying to bring down rising food and energy costs, as early as the 1970s and early 1980s.

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

5 Big Drivers of Higher Inflation Rates Ahead

5 Big Drivers of Higher Inflation Rates Ahead

Investors got lulled into a state of inflation complacency.  Persistently low official inflation rates in recent years depressed bond yields along with risk premiums on all financial assets.

That’s changing in 2018. Five drivers of higher inflation rates are now starting to kick in.

Inflation Driver #1: Rising CPI

The Consumer Price Index (CPI) is a notoriously flawed measure of inflation.  It tends to understate real-world price increases. Nevertheless, CPI is the most widely followed measure of inflation.  When it moves up, so do inflation expectations by investors.

Insert Junk silver tile – verify the premiums displayed.

On February 13th, the Labor Department released stronger than expected CPI numbers.  Prices rose a robust 0.5% in January, with headline CPI coming in at 2.1% annualized (against expectations of 1.9%).

In response to the inflationary tailwinds, precious metals and natural resource stocks rallied strongly, while the struggling U.S. bond market took another hit.

Inflation Driver #2: Rising Interest Rates

Since peaking in mid-2016, the bond market has been stair-stepping lower (meaning yields are moving higher). In February, key technical levels were breached as 30-year Treasury yields surged above 3%. Some analysts are now calling a new secular rise in interest rates to be underway after more than three decades of generally falling rates.

The last big surge in interest rates started in the mid 1970s and coincided with relentless “stagflation” and soaring precious metals prices. It wasn’t until interest rates hit double digit levels in the early 1980s that inflation was finally quelled and gold and silver markets tamed.

Rising nominal interest rates are bullish for inflationary assets such as precious metals so long as interest rates are following the lead of inflation rates.  Only when interest rates get out ahead of inflation and turn positive in real terms are rising rates bearish.

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

Rising Interest Rates: New Era with Tough Outcomes

Rising Interest Rates: New Era with Tough Outcomes

 

What will the bond market do? The conniptions in the Treasury market are causing pain in existing portfolios but offer opportunities down the road. What’s the impact of these rising interest rates on the housing bubbles in the US and Canada? Where is the pain threshold? How will it differ in the US and Canada? And what will higher interest rates do to new- and used-vehicle sales? We’re at the beginning of a new era with potentially tough outcomes.

The Fed’s monetary policy shift is finally taking hold. It just took a while. The Louis Fed Financial Stress index spiked beautifully and suddenly, from historic lows back in November. Read…  “Financial Stress” Spikes. Markets, Long in Denial, Suddenly Grapple with New Era

Central Banks Will Let The Next Crash Happen

Central Banks Will Let The Next Crash Happen

If you have been following the public commentary from central banks around the world the past few months, you know that there has been a considerable change in tone compared to the last several years.

For example, officials at the European Central Bank are hinting at a taper of stimulus measures by September of this year and some EU economists are expecting a rate hike by December. The Bank of England has already started its own rate hike program and has warned of more hikes to come in the near term. The Bank of Canada is continuing with interest rate hikes and signaled more to come over the course of this year. The Bank of Japan has been cutting bond purchases, launching rumors that governor Haruhiko Kuroda will oversee the long overdue taper of Japan’s seemingly endless stimulus measures, which have now amounted to an official balance sheet of around $5 trillion.

This global trend of “fiscal tightening” is yet another piece of evidence indicating that central banks are NOT governed independently from one another, but that they act in concert with each other based on the same marching orders. That said, none of the trend reversals in other central banks compares to the vast shift in policy direction shown by the Federal Reserve.

First came the taper of QE, which almost no one thought would happen. Then came the interest rate hikes, which most analysts both mainstream and alternative said were impossible, and now the Fed is also unwinding its balance sheet of around $4 trillion, and it is unwinding faster than anyone expected.

Now, mainstream economists will say a number of things on this issue — they will point out that many investors simply do not believe the Fed will follow through with this tightening program.

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

Four Rate Hikes in 2018 as US National Debt Will Spike

Four Rate Hikes in 2018 as US National Debt Will Spike

Chorus gets louder. But no one will be ready for those mortgage rates.

It didn’t take long for rate-hike expectations to be jostled further by last week’s “monster” two-year budget bill that Congress passed with its usual gyrations, including a government mini-shutdown, and that Trump signed into law on Friday. The bill increases spending caps by $300 billion over the next two years. It includes an additional $165 billion for the Pentagon and $131 billion for non-defense programs.

The bill comes after the tax cuts slashed expected revenues by $1.5 trillion of the next ten years. So pretty soon this is starting to add up.

Going forward, the US gross national debt will likely balloon at a rate of over $1 trillion a year, every year, even during the best of times. It’s $20.5 trillion currently [update 3 hours later, after debt ceiling suspended: $20.7 trillion]. It will likely be over $21.5 trillion a year from now – and this when the US economy is expected to boom. Any downturn will cause the debt to spike.

And what will the Fed do?

Four rate hikes this year – that’s what Credit Suisse’s US economists said in a research note on Monday. Previously, they’d expected three rate hikes for 2018.

“The FOMC has already boosted their growth outlook for 2018 in light of the tax bill passed in December and we anticipate another upward revision to their growth forecast at the March meeting,” the economists wrote in the research note, according to Reuters.

“With the economy near (or above) full employment, prudent risk management suggests the Fed ought to accelerate their tightening in response to a large positive demand shock,” they said.

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

Take It To The Bank: Interest Rates Won’t Rise, Report 11 Feb 2018

How Not to Predict Interest Rates

We continue our hiatus from capital destruction to look further at interest rates. Last week, our Report was almost prescient. We said:

The first thing we must say about this is that people should pick one: (A) rising stock market or (B) rising interest rates. They both cannot be true (though we could have falling rates and falling stocks).

We write these Reports over the weekend. At the time of last week’s writing session, Friday’s close on the S&P was 2757 (futures). Monday this week saw a crash, with the S&P down to 2529 at the low point in the evening. That is a drop of -8.3%.

We are not stock prognosticators, and we will neither tell you “short the market” nor “buy the dip”. We have a different point to make.

Rising interest rates, by a variety of mechanisms, cause stocks and all asset prices to go down. We have touched on a few in this Report. One is that investors have a choice between the risk-free asset—the Treasury bond—and anything else (note: the Treasury bond is not risk free, but if it defaults then everything else will be wiped out in the collapse). Why would they accept a lower yield on stocks along with the greater risk? Another is that corporations can borrow to buy their own shares. Management may do this if the interest rate is lower than their shares yield. But they can sell shares to pay off debt if the shares have lower yield than the interest rate.

Let’s look at a few more.

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

BIS Publishes A “Simplified” Map Of China’s Shadow Banking System

While China’s shadow banking sector may have been tamed in the past year as a result of an aggressive crackdown by Beijing over the unregulated, gray-market in high interest lending and especially Wealth Management Products or WMPs, it, it still retains an aura of incomprehensibility – and thus fascination – to most market watchers.

Still, while growth of shadow credit to ultimate borrowers has slowed, the use of shadow saving instruments (eg wealth management products, trust products) has continued to expand at a fast pace. New and more complex “structured” shadow credit intermediation aimed at reducing banks’ regulatory burden has emerged and quickly reached a large scale. Meanwhile, the bond market has become highly dependent on funding channeled through wealth management products. As a result, Chinese shadow banking is becoming slightly more similar to US shadow banking.

To help China watchers in their analysis of China’s financial underworld, overnight the Bank of International Settlements published a working paper  mapping China’s shadow banking sector, which studies the “structure of the shadow banking system in China, focusing on the main activities and linkages with the formal banking sector.”

As the BIS explains in its abstract:

We develop a stylised shadow banking map for China with the aim of providing a coherent picture of its structure and the associated financial system interlinkages. Five key characteristics emerge. One defining feature of the shadow banking system in China is the dominant role of commercial banks, true to the adage that shadow banking in China is the “shadow of the banks”. Moreover, it differs from shadow banking in the United States in that securitisation and market-based instruments play only a limited role. With a series of maps we show that the size and dynamics of shadow banking in China have been changing rapidly.

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

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

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

The new Fed Chair may break from his predecessors

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

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

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

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

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

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

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

Rising Debt + Rising Rates

Rising Debt + Rising Rates

Have they all lost their collective minds? Look I get that some people are leaning Democrat versus Republican and vice versa and that’s fine, but what exactly are voters getting? If, on the one hand, you think Democrats tax and spend too much you get Republicans on the other hand who cut taxes with disproportional benefit to the top 1% and then spend even more. Fiscal conservatives? Please.

In early February the US government was already scheduled to borrow nearly $1 trillion this year. 

A week later and that figure is already out the door as this week both parties agreed to expand spending caps seemingly preparing for World War III. An incremental hundreds of billions of dollars to the military budget alone in just 2 years. What for? To what end? It’s a bonanza for defense contractors surely and the president apparently wants a parade, but have we entered the math no longer applies zone?

The numbers are staggering:

Ok, if nobody will say it I will: This is insane.
Just the increase alone is larger than Russia’s entire annual military budget.
“The budget deal would raise military spending by $80B through the rest of fiscal year and by $85B in fiscal year 2019”https://www.marketwatch.com/story/congressional-leaders-say-theyve-struck-two-year-budget-deal-2018-02-07?link=sfmw_tw 


The end result? Much, much more borrowing and deficits into the trillion+ range forever and ever amen:

2019? Looks lot be $1.4 Trillion.

I didn’t see these figures mentioned in any campaign brochures have you? And this is all pre-recession folks. We get a recession and you are looking at 2-3 trillion dollar deficits.

Think I’m going hyperbole on you?

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

Red Screen At Morning, Investor Take Warning

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Red Screen At Morning, Investor Take Warning

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

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

Red sky at night, sailor’s delight;

Red sky at morning, sailor take warning.

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

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

Red Sky In The Markets

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

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

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

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

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

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

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