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Loonie Drops As Bank Of Canada Holds Rates (As Expected)

With Canadian economic data at its most disappointing in 20 months, domestic trade-wars over oil pipelines exploding, and a housing market on the verge of collapse, The Bank of Canada held rates unchanged (as expected), sending a weak signal that sparked Loonie selling

Bank of Canada Holds Benchmark Overnight Rate at 1.25%

2018 has not been a good one for Canada’s economy…

but BOC writes off 1Q growth weakness, saying it will rebound in 2Q.

Slower economic growth in the first quarter primarily reflects weakness in two areas. Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017. Exports also faltered, partly owing to transportation bottlenecks. Some of the weakness in housing and exports is expected to be unwound as 2018 progresses.

Also says the economy will be slightly above potential over the next 3 years, crediting federal and provincial budget measures.

But the FX market is not buying it…

The central bank played down a faster-than-expected pick-up in inflation as temporary, arguing the shocks of higher gas prices and minimum wages in some provinces will dissipate by 2019.

These releases codify Poloz’s narrative the expansion can be prolonged without fueling inflation.

Key highlights (vis Bloomberg):

  • BOC reiterates that “Governing Council will remain cautious with respect to future policy adjustments” and be “guided by incoming data”
  • BOC: “Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed”
  • Inflation expected to average 2.3% over 2018, from 2.0% previously; Core measures have edged up to near 2 percent, “consistent with an economy operating with little slack”
  • Wage growth is firming, but Bank “will continue to assess labour market data for signs of remaining slack”
  • Bank of Canada makes upward revision to 2019 growth: GDP expected to grow 2.0% in 2018 and 2.1% in 2019, from 2.2% and 1.6% respectively;
  • Housing will not contribute to growth in 2018 and 2019, exports will not contribute to growth in 2018 (from +0.6pp previously)

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

“They Know What’s Going To Happen” Governments And Big Banks Are Stockpiling Gold Ahead Of Massive Economic Collapse

“They Know What’s Going To Happen” Governments And Big Banks Are Stockpiling Gold Ahead Of Massive Economic Collapse

The writing is on the wall and major financial institutions across the world are warning about the economic disaster to come. Unabated money printing, tariff trade wars, rising interest rates and retail slowdowns point to one result, and it’s going to be brutal. Big banks and governments know what’s coming and they are preparing for this eventuality by stockpiling huge amounts of “real money” ahead of the crisis.

According to Keith Neumeyer, the CEO of the world’s top primary silver producer First Majestic Silver and chairman of First Mining Gold, the cartels he’s previously reported to the CFTC have continued to manipulate the prices of precious metals while loading up their own vaults with gold and silver. The answer to why they’re doing it is simple, as Neumeyer highlights in a recent interview with SGT Report:

The verdict is still out on whether we’re going into a dis-inflationary or inflationary environment… gold can do well in both environments… the fact of the matter is governments are printing extraordinary amounts of fiat currencies and that is not going to change…

The stage is set for higher gold prices due to the amount of money being printed… I am of the belief a major reset is coming where the governments of the world will need to get rid of their debt by fixing everything to the price of gold… and that’s why governments like China and Russia and other governments around the world are accumulating gold… it’s because they know what’s going to happen over the next several years…


(Watch at Youtube)

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

RBC Warns Cracks “Starting To Show” In Canadian Credit

One often wonders if the government will ever realize that, due to its policies, its “solutions” often wind up turning into bigger problems than the ones they set out to address initially? Not only that, but this has been the case for decades, and it will continue to be the case until we “engineer” ourselves into a crisis that is too big to fix or too overwhelming to print our way out of.

Every day we discuss various aspects of a system that ends up far worse off due to a government apparatus that is convinced it knows best and that intervention and interfering are the solution to the problem. In essence, much of the financial crisis of 2008 was a result of the government interfering in the housing market in years prior, combined with the Fed not being able to forecast the crisis, despite widely ostracized skeptics such as Peter Schiff stating repeatedly that the housing market was heading into the abyss.

Today, we face a new set of challenges as a result of the way governments and central banks dealt (or rather, didn’t) with the 2008 financial crisis. In the United States there are bubbles forming in student loans and subprime auto lending,  while mortgage debt and consumer credit both look to soon be out of control yet again.

Meanwhile, the problem is spreading geographically and today we are presented with yet another “solution turned into problem”, and as Bloomberg reports, RBC now sees “cracks” in consumer credit becoming a problem yet again, this time in Canada. The combination of low interest rates and the cheap and easy access to capital has yet again gone from being a solution to a problem, as Canadian lenders are seeing delinquency rates “roll” out in time and duration.

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

Dissecting the Madness of Economic Reason

David Harvey’s latest book provides a riveting reading of Marx’s Capital and a trenchant critique of a political and economic system spiralling out of control.

A decade after the financial crisis of 2008, global capitalism remains in dire straits. Despite central banks providing a steady diet of low interest rates and pumping over $12 trillion of new money into the world economy through quantitative easing, growth remains anaemic, even as debt levels in many countries are back on the rise and inequality rapidly spirals out of control. Secular stagnation now goes hand in hand with the emergence of new speculative bubbles in stocks and housing, raising fears that fresh financial turmoil and further debt crises may only be a matter of time.

With mainstream economics clearly incapable of providing a satisfactory account of capitalism’s inherent tendency towards crisis formation, the past decade has seen a resurgence of interest in the work of Karl Marx, undoubtedly the most astute observer of the system’s internal contradictions. Perhaps no other living scholar has played a more important role in this renaissance of Marxist theorizing than David Harvey, the geographer whose many books and celebrated online course on Capital weaned a new generation of students and activists on an innovative reading of Marx’s critique of political economy.

In his new book, Marx, Capital, and the Madness of Economic Reason, Harvey provides a concise introduction to Marx’s theoretical framework and a compelling argument for its increasing relevance to the “insane and deeply troubling world in which we live.” Fleshing out a number of ideas first presented as part of a lecture series at the City University of New York, where he is Distinguished Professor of Anthropology and Geography, the book is characteristic of the “late Harvey”: incisive in its analysis, sweeping in its scope, accessible in its style and laced with profound insights on the madness of the economic system under which we live.

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

The Next Crisis Will Be The Last

The Next Crisis Will Be The Last

It is an interesting thing.

Throughout the last four decades there is a direct link between the actions of the Federal Reserve and the eventual economic and market outcomes due to changes in monetary policy. In every case, that outcome has been negative.

The general consensus continues to be the markets have entered into a “permanently high plateau,” or an era in which asset price corrections have been effectively eliminated through fiscal and monetary policy. The lack of understanding of economic and market cycles was on full display Monday as Peter Navarro told investors to just “buy the dip.”

“I’m thinking the smart money is certainly going to buy on the dips here because the economy is as strong as an ox.”

I urge you not to fall prey to the “This Time Is Different” thought process.

Despite the consensus belief that global growth is gathering steam, there is mounting evidence of financial strain rising throughout the financial ecosystem, which as I addressed previously, is a direct result of the Fed’s monetary policy actions. Economic growth remains weak, wages are not growing, and job growth remains below the rate of working age population growth.

While the talking points of the economy being as “strong as an ox” is certainly “media friendly,” The yield curve, as shown below, is telling a different story. While the spread between 2-year and 10-year Treasury rates has not fallen into negative territory as of yet, they are certainly headed in that direction.

This is an important distinction. The mistake that most analysts make in an attempt to support a current view is to look at a specific data point. However, when analyzing data, it is not necessarily the current data point that is important, but the trend of the data that tells the story.

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

BofA’s Striking Admission: Markets Will Soon Begin To Panic About Debt Sustainability

In the latest BofA survey of European fixed income investors (both IG and high yiled), the bank’s credit analyst Barnaby Martin writes that “after fretting about inflation at the start of the year, April’s credit survey shows that the biggest concern has reverted back to “Quantitative Failure”, driven by the recent data slowdown.”

Indeed, as the chart below shows, whereas the evolution of “biggest risks” for Euro investors indicated that strong growth at the start of the year provoked worries over rising inflation, “the recent data moderation has meant that these concerns have quickly given way to worries about a lack of inflation – and thus “Quantitative Failure”.”  And yes, it took just three months for the market to make a 180 and worry not about inflation, but deflation, and a Fed that may be pursuing too many rate hikes into 2018. As Martin notes, “the speed at which inflation concerns have flipped highlights the slim margin of error for a “goldilocks” economic backdrop in ’18.”

In retrospect, however, the sudden reversal is probably not that much of a surprise: as we showed this morning, according to the Citi G-10 Eco Surprise index, after hitting the highest level since the financial crisis, economic surprises promptly tumbled into the red just three months later, confirming how tenuous and fleeting the so-called “global coordinated economic recovery” had been all along.

And yet this sudden reversal puts the Fed and central banks in a major quandary. Recall that in a world with over $200 trillion in debt, amounting to well over 300% of Global GDP, the only saving grace is for the debt to get inflated as the alternative is default, either sovereign or private.

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

Playing for All the Marbles

Playing for All the Marbles

Global Plunge Protection Teams must be ordering take-out food; every night is a long one now.

The current stocks/bonds game is for all the marbles, by which I mean the status quo now depends on valuations and interest rates remaining near their current levels for the system to function.

If interest rates soar and/or stocks plummet, the game is over: pension funds collapse, tax revenues drop, debt based on high asset valuations defaults, employment craters and the much-lauded “wealth effect” reverses into a “negative wealth effect” (i.e. everyone looking at their IRA or 401K statement feels poorer every month).

Let’s scan a few relevant charts to understand why this game is for all the marbles. Given the systemic fragility of the global economy, a crash in one asset class or a rise in interest rates trigger defaults, sell-offs, etc. that forcibly revalue other assets.

So the Powers That Be can’t afford to let any asset crash, as a crash will bring down the entire system. Why is this so? The resiliency of the system has been eroded by permanent central bank/central state intervention/stimulus. Withdrawing the stimulus means markets have to go cold turkey, and they’ve lost the ability to do so.

Permanent stimulus creates dependencies and distortions, and both the distortions and the dependencies introduce a host of unintended consequences. What’s the “market price” of assets? You must be joking: the “market” prices assets based on policies of permanent stimulus and asset purchases by central banks.

In effect, markets have been hijacked to function as signaling mechanisms(everything’s great because your IRA account balance keeps going up) and as floors supporting pensions, insurance companies, IRAs/401Ks, etc.: all these financial promises are only plausible if asset valuations keep rising.

Fly in the ointment #1: equity valuations have lost touch with the real economy, as measured (imperfectly) by GDP:

 

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

The Risk of the Fed’s Continuous Rate Hikes

The Risk of the Fed’s Continuous Rate Hikes

jerome powell raises rates

This past week, the Fed raised interest rates by 0.25%. The effective Fed fund rate is now 1.63% – the highest since the big market crash of 2008.

However, it could get as high as 3.375% by 2020. The decade 2020 – 2029 could see a high-tech version of the early-1980’s when home loans fetched interest rates up to 18%.

It was only a couple years ago when raising rates seemed like a “boy who cried wolf” idea. Now we’re seeing one rate hike after the other, with two more expected for 2018.

Does the Fed have something up their sleeve, or are they hanging on to false hope?

The Fed is Either in Denial or Misleading Us About the Economy

While the Fed’s decision to raise rates was predictable, the rest of their announcement wasn’t.

In the recent FOMC report the Fed paints a rosy picture about the state of our economic situation. They stated the outlook has “strengthened in recent months.”

Then they claimed a better unemployment rate at 4.1%. And it is, if you’re only reporting the statistics that make things look good.

We know that rate is misleading for one simple fact…

Anyone who is not looking for work is not considered part of the calculation.

As more and more people leave the workforce altogether, and give up looking for work, they get culled from the calculation reported in the media which skews the statistic.

The truth is, the unemployment rate is much higher than the media reports. It’s actually closer to 8.2% as of February 2018.

So is the Fed in denial about the state of our economy? Is it telling white lies? Or a combination of both?

 

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

Wolf Richter: The Era Of The Fed “Put” Is Over

It now wants lower asset prices (just not too fast)

To all those investors expecting the Fed to step in to backstop the recent weakness seen in the stock market, Wolf Richter warns: The cavalry isn’t coming.

After years of force-feeding too much liquidity into world markets, the central banking cartel is now aware of the Franken-markets it has created. And now with a new head at the US Federal Reserve, and soon at the ECB, central bankers have shifted their priority from supporting asset prices to now actively engineering lower prices.

They just don’t want prices to drop too far too fast.

Of course, the big question is: how much control do they really have? The situation may very quickly get out of their hands.

But the big takeaway is to expect lower prices across the board for nearly every “risk on” asset: stocks (including and especially the FANGS), corporate bonds and real estate. The Fed is working to reduce investor exuberance — and as many bloodied contrarian investors will warn you — Don’t fight the Fed:

Now we’re in an environment where we have an Everything Bubble, and even though there’s still a few central bankers out there that say that they can’t see the bubble, others have now acknowledged it. Of course they don’t call it a “bubble”; they say that prices are “elevated”. So they’re seeing this. In my opinion, a lot of the responses from the Fed are not really about inflation; they’re really about trying to avoid the asset bubble from getting any bigger. They’re trying to avoid a deflation of that asset bubble that could be very messy for the financial system.

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

The Future Ain’t What It Used To Be

© Rangizzz | Dreamstime.com

The Future Ain’t What It Used To Be

Looks like we’re in for a much rockier ride than many expect

This marks our our 10th year of doing this.  And by “this”, we mean using data, logic and reason to support the very basic conclusion that infinite growth on a finite planet is impossible. 

Surprisingly, this simple, rational idea — despite its huge and fast-growing pile of corroborating evidence — still encounters tremendous pushback from society. Why? Because it runs afoul of most people’s deep-seated belief systems.

Our decade of experience delivering this message has hammered home what behavioral scientists have been telling us for years — that, with rare exceptions, we humans are not rational. We’re rationalizers. We try to force our perception of reality to fit our beliefs; rather than the other way around.

Which is why the vast amount of grief, angst and encroaching dread that most people feel in western cultures today is likely due to the fact that, deep down, whether we’re willing to admit it to ourselves or not, everybody already knows the truth: Our way of life is unsustainable.

In our hearts, we fear that someday, possibly soon, our comfy way of life will be ripped away; like a warm blanket snatched off of our sleeping bodies on a cold night.

The simple reality is that society’s hopes for a “modern consumer-class lifestyle for all” are incompatible with the accelerating imbalance between the (still growing) human population and the (increasingly depleting) planet’s natural resources. Basic math and physics tell us that the Earth’s ecosystems can’t handle the load for much longer.

The only remaining question concerns how fast the adjustment happens. Will the future be defined by a “slow burn”, one that steadily degrades our living standards over generations? Or will we experience a sudden series of sharp shocks that plunge the world into chaos and conflict?

It’s hard to say. As Yogi Berra famously quipped, “It’s tough to make predictions, especially about the future.”  So, it’s left to us to remain open-minded and flexible as we draw up our plans for how we’ll personally persevere through the coming years of change.

But even while the specifics about the future elude us today, “predicting” the macro trends most likely to influence the coming decades is very doable:

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

How Many Trillions In Debt Are Linked To Soaring LIBOR?

Over the past month as Libor continued its relentless upward creep and is now higher for 37 consecutive sessions, the longest streak of advances since November 2005, and rising to 2.3118% while blowing out the Libor-OIS spread to a crisis-like 59bps, a cottage industry has developed to explain what is behind the dramatic move in Libor, and which – as we noted 2 weeks ago – can be roughly summarized as follows:

  • an increase in short-term bond (T-bill) issuance
  • rising outflow pressures on dollar deposits in the US owing to rising short-term rates
  • repatriation to cope with US Tax Cuts and Jobs Act (TCJA) and new trade policies, and concerns on dollar liquidity outside the US
  • risk premium for uncertainty of US monetary policy
  • recently elevated credit spreads (CDS) of banks
  • demand for funds in preparation for market stress

To be sure, we have commented extensively on what may (or may not) be behind the Libor blow out: if as many claim, the move is a benign technicality and a temporary imbalance in money market supply and demand, largely a function of tax reform (including the Base Erosion Anti-Abuse Tax) or alternatively of the $300BN surge in T-Bill supply in the past month, the Libor move should start fading. If it doesn’t, it will be time to get nervous.

But no matter what the reason is behind the Libor move, the reality is that financial conditions are far tighter as a result of the sharp move higher in short-term rates in general, and Libor in particular, which for at least a few more years, remains the benchmark rate referenced by trillions in fixed income instruments.

Which brings us to a logical follow up question: ignoring the reasons behind the move, how does a higher Libor rate spread throughout the financial system, and related to that, how much notional debt is at risk of paying far higher interest expense, if only temporarily, resulting in even tighter financial conditions.

For the answer, we look at the various ways that Libor, and short-term rates in general “channel” into the economy. Here, as JPMorgan explains, the key driver is and always has been monetary policy, which controls short-term rates, which affect the economy via various channels and pahtways. Below we list those channels along with a brief description:

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

Who Needs Wall Street When You Can Have A Monetary Unicorn?

Who Needs Wall Street When You Can Have A Monetary Unicorn?

The single most important price in all of capitalism is the interest rate—-and at all points on the maturity curve. And the single most important truth about honest interest rates is that they must be discovered by markets, not imposed by the state.

We got to ruminating about those core propositions when we read that San Francisco Fed head, John Williams, may be headed toward the true #2 job at the Fed. That is, President of the New York Fed—-the joint that actually runs the casinos domiciled in the canyons of Wall Street.

We did not burst out laughing exactly, but nearly so. After all, why do you even need Wall Street if you are going to have John Williams running the joint?

Recall that Dr. Williams claims to see a financial apparition that no one has ever touched, measured, photographed, X-rayed or otherwise proven the existence of. We are referring, of course, to the “Neutral Rate of Interest”.

By contrast, Dr. Williams is certain that he has spotted it, measured it and completely understood it. Indeed, he is so certain that in recent times it has been extraordinarily low, that he wants to run the entire $19.7 trillion US economy on the basis of it.

That is, peg actual interest rates in the money market based on a theoretical rate that might as well be the equivalent of a Monetary Unicorn. That’s because no one on the bond and bill trading desks of Wall Street has ever seen it, or ever will.

Not only that, but Dr. Williams now suggests that we actually need even more inflation than the sacred 2.00% target to cure whatever ails the US economy, and that his Monetary Unicorn told him so. Thus, as per the AM’s Wall Street Journal:

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

The Fed is Raising Rates Because of the Pension Crisis

QUESTION: The Fed says it will raise rates two or three times more this year. My question is this: If the stock market is crashing, why are they still raising rates?

HW

ANSWER: The Fed is raising rates because they must be NORMALIZED given the pension crisis. They are trying to get then back up and if they could, they would jack them up to 8%. If you can imagine, a pension fund under normal conditions needs 8% annual. Even CalPERS came in at 7% and they were insolvent. Rates are rising because of the pension crisis, not because the economy is really heating up or the stock market is booming. The technical resistance stands at the Downtrend Line at the 3% level. Rates will double to reach that area faster than people suspect.

We have a Directional Change due in May and look at the August/September period where we also have a Panic Cycle. Things are not going to be as smooth-sailing as many believe. We have a very RARE Double Monthly Bullish Reversal at 2.25%. A monthly closing above that level and 5% will be seen in a matter of months.

Consequences of Replacing the Gold Standard with the PhD Standard

In 2011, Jim Grant chastised the Fed about replacing the Gold Standard with the PhD Standard. Our “reward” is coming up.

Here is the pertinent video clip of James Grant.

“The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true. … William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard.

Grant is correct. The result has been a series of economic bubbles with increasing amplitudes over time.

The Alps Precious Metals Group commented on Grant in its latest monthly letter.

We’re Smarter Now

​>Jim Grant is spot-on in his description of what has transpired: “We have replaced the Gold Standard with the PhD Standard”.

Consistent with our post-Modern zeitgeist, we have traded the wisdom of old for the cockiness of what I call the “We’re much smarter now” syndrome. Hence the propensity of Western governments over the last 50 years to deplete their supplies of the “barbarous relic” as Gold’s time “has passed”.

Tulips, South Sea and Florida Real Estate ventures, Roaring ‘20’s stocks bought at 10x leverage as a norm, as well as innumerable investment ideas since 1971 when Nixon closed the Gold window are all examples of investments based solely on confidence, the ebb and flow of which resulted in volatile “risk on and off” episodes.

The last material loss of confidence in the system was in 2008/early 2009; which resulted in a series of experiments whose 9-year anniversary is upon us.

What happens when Common Knowledge changes and moves over to something else that “everyone knows that everyone knows”? Not unlike the ferocious tornados which rip across the American continent when winter turns to spring, the change may be rapid and violent.

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

 

 

The Central Bank Bubble: It Will Be Ugly

The Central Bank Bubble: It Will Be Ugly

The global economy has been living through a period of central bank insanity, thanks to a little-understood expansion strategy known as quantitative easing, which has destroyed main-street and benefitted wall street.

Central Banks over the last decade simply created credit out of thin air. Snap a finger, and credit magically appears. Only central banks can perform this type of credit magic. It’s called printing money and they have gone on the record saying they are magic people. 

Increasing the money supply lowers interest rates, which makes it easier for banks to offer loans. Easy loans allow businesses to expand and provides consumers with more credit to buy goods and increase their debt. As a country’s debt increases, its currency eventually debases, and the world is currently at historic global debt levels. 

Simply put, the world’s central banks are playing a game of monopoly.

With securities being bought by a currency that is backed by debt rather than actual value, we have recently seen $9.7 trillion in bonds with a negative yield. At maturity, the bond holders will actually lose money, thanks to the global central banks’ strategies. The Federal Reserve has already hinted that negative interest rates will be coming in the next recession.

These massive bond purchases have kept volatility relatively stable, but that can change quickly. High inflation is becoming a real possibility. China, which is planning to dethrone the dollar by backing the Yuan with gold, may survive the coming central banking bubble. Many other countries will be left scrambling. Some central banks are attempting to turn the current expansion policies around. Both the Federal Reserve, the Bank of Canada, and the Bank of England have plans to hike interest rates. The European Central Bank is planning to reduce its purchases of bonds. Is this too little, too late?

…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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