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Blain: It Feels Like A Liquidity Storm Is Coming Soon

Blain: It Feels Like A Liquidity Storm Is Coming Soon

I note with some delight Bernie Sanders plans to stand for US President. One of my US chums sent me the story of the Half-a-Bernie sign propped up against a wall. Someone had cut it neatly in two and left the wooden handle affixed to the remaining half. Attached was a note: “Dear Bernie; you had a sign and I didn’t, so I took half. I’m sure you understand.” 

I did feel something of a market judder yesterday – just a moment where it felt like all the negativity was on the verge of swamping markets. Whether is the cumulative effect of US rate path expectations (Fed today), China Trade Wars, Trump vs Europe, (ECB tomorrow), Brexit, and all the rest.. or the UK mid-term holidays, the whole market feels thin and rudderless.

At least Wal-Mart surprised to the upside! One of my top stock technical commentators is my old buddy Steve Previs of Mint who calls it “complacent.” That’s never a good thing. His charts are telling him to look for a “corrective C wave” but for now he’s patient as “FOMO” (Fear of Missing Out) continues to drive the current trend.

I am fortunate enough to work with some very bright folk here at Shard. Yesterday we were shooting the breeze on the current market uncertainties, threats and fears. We came to the conclusion we’ll know the moment we hit the Reefs of Crisis when we hear the crashing wail of market liquidity vanishing. What’s that sound – it’s the Macro Liquidity Storm! Coming to a market near you. Maybe Very Soon!

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

Will the Trade War Lead to Real War with China?

Will the Trade War Lead to Real War with China?

Chas Freeman

Five hundred years ago, Hernán Cortés began the European annihilation of the Mayan, Aztec, and other indigenous civilizations in the Western Hemisphere.  Six months later, in August 1519, Magellan [Fernão de Magalhães] launched his circumnavigation of the globe.  For five centuries thereafter, a series of Western powers — Portugal, Spain, Holland, Great Britain, France, Germany, Russia, and, finally, the United States — overturned preexisting regional orders as they imposed their own on the world.  That era has now come to an end.

In the final phases of the age of Western dominance, we Americans made and enforced the rules.  We were empowered to do so in two phases.  First, around 1880, the United States became the world’s largest economy.  Then, in 1945, having liberated Western Europe from Germany and overthrown Japanese hegemony in East Asia, Americans achieved primacy in both the Atlantic and Pacific.  Almost immediately, the Soviet Union and its then-apparently-faithful Asian companion, Communist China, challenged our new sphere of influence.  In response, we placed our defeated enemies (Germany, Italy, Japan), our wartime allies, and most countries previously occupied by our enemies under American protection.  With our help, these countries — which we called “allies” — soon returned to wealth and power but remained our protectorates.  Now other countries, like China and India, are rising to challenge our global supremacy.

Trump, joined by other U.S. officials, receives Chinese Vice Premier Liu He in Oval Office, January 2019 (Official White House Photo by Tia Dufour via Flickr )

Trump receives Chinese Vice Premier Liu He in Oval Office, January 2019 (Official White House Photo by Tia Dufour via Flickr )

President Donald Trump has raised the very pertinent question: Should states with the formidable capabilities longstanding American “allies” now have still be partial wards of the U.S. taxpayer?  In terms of our own security, are they assets or liabilities?  Another way of putting this is to ask: Do our Cold War allies and their neighbors now face credible threats that they cannot handle by themselves? 

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

Gold Will Become the Next Global Currency of Choice

Gold Will Become the Next Global Currency of Choice

With a wobbly stock market, falling Treasury yields and rampant geopolitical strife, the focus on gold as an asset has been intense as of late. The metal’s price gains reflect this, as gold recently proved able to hold above a key resistance level, which holds bullish implications.

But according to Kitco, Sprott CEO Peter Grosskopf sees gold moving past its role as a mere asset and eventually returning to its status as a true global currency. In an interview, Grosskopf explained that this will be fueled by ballooning global debt, which will ultimately debase all fiat currencies.

As Grosskopf pointed out, recent data shows that the global debt rests above $244 trillion and, as such, is more than three times larger than the global economy itself. Whether governments decide to deal with this through quantitative easing or financial repression, he says gold prices will invariably spike.

The recognition of gold’s role in wealth preservation is on the rise, said Grosskopf, with investors increasingly shying away from fiat currencies and moving into gold. The widespread loss of faith in not just assets, but currencies as well, is already in effect, with Grosskopf’s firm noticing more interest from all corners of the investment spectrum.

“We think the overall trend for gold is positive because it is being accumulated,” said the CEO. “It’s being accumulated by central banks; it’s being accumulated by billionaires, it’s been accumulated by endowments and it’s more accepted as a class of currencies in portfolios.”

This New Catalyst Will Drive Silver Prices Higher in 2019

Money Morning’s Peter Krauth writes silver’s recent pullback below the $16 level was not only expected, but also irrelevant for its long-term picture. Even after the pullback, the metal remains up 12% since November, and Krauth sees more gains coming in the near future.

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

Bill Dudley Slams MMT: “It Failed In Germany, Venezuela And Zimbabwe”

Bill Dudley Slams MMT: “It Failed In Germany, Venezuela And Zimbabwe”

While there has been much disagreement among the financial elite about the ultimate consequences of central bank activism and market manipulation, with some – usually those who do not manage money for a living and are not paid by investors – predicting fire and brimstone, while a separate, far more optimistic group expects the world’s greatest experiment in monetary policy to somehow have a happy ending, when it comes to socialism disguised as monetary policy, besides a certain, politically-influenced fringe, the condemnation against “helicopter money” wrapped in a convenient political wrapper has mostly been uniform.

We are talking, of course, about MMT, which stands for Modern Money Theory, but would make far more sense if it stood stand for Magic Money Tree, as the theory effectively espouses unlimited money printing and skipping central banks as intermediaries in money creation which, however, the theory claims does not result in hyperinflation because, somehow, taxation manages to limit the amount of money in circulation and the result is monetary utopia.

It is therefore hardly a surprise that MMT has emerged as the pet financial theory for such socialist politicians as Bernie Sanders and Alexandra Ocasio-Jones (the biggest proponent of MMT is finance professor Stephanie Kelton who previously worked on Sanders’ presidential campaign and was a “chief economist for the Dems on the Senate Budget Committee”), who get to promise their potential voters pretty much everything while also vowing not to worry about the insane costs that delivering “everything” would entail (AOC’s Green New Deal is said to cost over $6 trillion and according to some, the bill would be north of $20 trillion).

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

Credit Exhaustion Is Global

Credit Exhaustion Is Global

Europe is awash in credit exhaustion, and so is China.

The signs are everywhere: credit exhaustion is global, and that means the global growth story is over: revenues and profits are all sliding as lending dries up and defaults pile up.

What is credit exhaustion? Qualified buyers don’t want to borrow more, leaving only the unqualified or speculators seeking to save a marginal bet gone bad with one more loan (which will soon be in default).

Lenders are faced with a lose-lose choice: either stop lending to unqualified borrowers and speculators, and lose the loan-origination fees, or issue the loans and take the immense losses when the punters and gamblers default.

Europe is awash in credit exhaustion, and so is China. China’s situation is unique, as credit expansion has been propping up the entire economy, from household wealth to corporate speculation to the export sector.As this article explains, The China Story That Is Far Bigger Than Apple, China’s trade balance–trade surpluses for decades–is close to slipping into trade deficits.

At the same time, China’s once-mighty pool of savings has diminished as consumption has risen. As a result, China now needs foreign investment more than it did in the previous era.Chinese businesses have borrowed around $2 trillion in US dollar-denominated debt, requiring the acquisition of dollars to service the debt.So far this sounds like a typical case of a fast-growth economy maturing into a trade-deficit, debt-dependent consumption economy.

What the article misses is the staggering rise in the cost of living in China over the past two decades. Some services are still affordable to the masses–subway fares are extremely cheap–and private healthcare is a mere fraction of healthcare costs in the U.S.But other costs–housing, food, clothing, etc.–…

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

Eating at Home vs. Eating Out

Eating at Home vs. Eating Out

eating at home vs eating out

Table of Contents

While many restaurants and fast food outlets offer us convincing marketing statements that they offer healthy and nutritional food, studies frequently find that this isn’t the case. The sugar and sodium content of most processed foods cause them to be serious threats to our health. These are also the same qualities which allow these foods to become addictive.

It’s not just fast food, either. The restaurant industry encourages overconsumption and indulgence in foods that we know to be unhealthy for our bodies. Nor is restaurant food as healthy for us as what we would make at home. At the same time, the cost of eating out puts a large strain on many of our food budgets.

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

The Birth of a Monster

The Birth of a Monster

The Federal Reserve’s doors have been open for “business” for one hundred years. In explaining the creation of this money-making machine (pun intended — the Fed remits nearly $100 bn. in profits each year to Congress) most people fall into one of two camps.

Those inclined to view the Fed as a helpful institution, fostering financial stability in a world of error-prone capitalists, explain the creation of the Fed as a natural and healthy outgrowth of the troubled National Banking System. How helpful the Fed has been is questionable at best, and in a recent book edited by Joe Salerno and me — The Fed at One Hundred — various contributors outline many (though by no means all) of the Fed’s shortcomings over the past century.

Others, mostly those with a skeptical view of the Fed, treat its creation as an exercise in secretive government meddling (as in G. Edward Griffin’s The Creature from Jekyll Island) or crony capitalism run amok (as in Murray Rothbard’s The Case Against the Fed).

In my own chapter in The Fed at One Hundred I find sympathies with both groups (you can download the chapter pdf here). The actual creation of the Fed is a tragically beautiful case study in closed-door Congressional deals and big banking’s ultimate victory over the American public. Neither of these facts emerged from nowhere, however. The fateful events that transpired in 1910 on Jekyll Island were the evolutionary outcome of over fifty years of government meddling in money. As such, the Fed is a natural (though terribly unfortunate) outgrowth of an ever more flawed and repressive monetary system.

Before the Fed

Allow me to give a brief reverse biographical sketch of the events leading up to the creation of a monster in 1914.

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

The failing engines of global growth

The failing engines of global growth

The global slowdown has been much discussed lately. A slowdown in Europe and China was considered to be the main reason for the December stock market rout combined with the balance sheet normalization (QT) program of the Federal Reserve. What is behind the slowdown?

No satisfactory answer has emerged, though China’s efforts to curb excessive lending are a natural candidate, in addition to the fact that central banks have been removing stimulus. The answer, however, goes deeper into the structure of modern economies.

We will show in the March issue of our Q-review that the world economy never actually recovered from the financial crisis, and explain the reasons why. The failure of the economic drivers of global growth, China, the Eurozone and the US, is at the heart of the non-recovery. We will delve into that here.

Killing the spirit 

In June 2017, we noticed that something strange was going on in the global economy. The growth of total factor productivity (TFP) had stagnated starting in 2011. This is something that should not happen in a growing economy.

TFP is the measure of that part of GDP growth that changes in the quality and quantity of investments and work force cannot explain. It’s generally thought to be the measure of technological change driving economic growth. If it stagnates, it means that production is not becoming more efficient. That is, the achieved production is just the sum of capital and labor. Stagnation thus implies that our ability to create productive innovations has halted. A serious omen, and yet this is exactly what has happened since 2011. Why?

Figure 1. Regional and global growth rates of total factor productivity (TFP) in percentage points. Source: GnS Economics, Conference Board

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

Doug Noland: Central Banks Are “Hostages Of Market Bubbles”

Doug Noland: Central Banks Are “Hostages Of Market Bubbles”

Doug Noland’s weekly Credit Bubble Bulletin is always required reading. The latest – befitting the amazing things that have happened lately – is more necessary than usual. But at 10,000 words it’s also a lot longer than usual. So while everyone should definitely read the whole thing, here are some excerpts to get you started:

I wonder if the Fed is comfortable seeing the markets dash skyward – the small caps up 16.4% y-t-d, the Banks 15.9%, the Transports 15.2%, Biotechs 18.5% and Semiconductors 17.0%. Or, perhaps, they’re quickly coming to recognize that they are now fully held hostage by market Bubbles.

Similarly, I ponder how Beijing feels about January’s booming Credit data – Aggregate Financing up $685 billion in the month of January. Do officials appreciate that they are completely held captive by history’s greatest Credit Bubble? 

Bubbles have become a fundamental geopolitical device – a stratagem. Things have regressed to a veritable global Financial Arms Race. As China/U.S. trade negotiations seemingly head down the homestretch, each side must believe that rallying domestic markets beget negotiating power. Meanwhile, emboldened global markets behave as if they have attained power surpassing mighty militaries and even nuclear arsenals.

China’s banks made the most new loans on record in January – totaling 3.23 trillion yuan ($477bn) – as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy.

January’s record China new bank loans were 11.4% higher than the previous record from January 2018 – and 15% above estimates. Total Bank Loans expanded 13.4% over the past year; 28% in two years; 45% in three years; 91% in five years; and an incredible 323% over the past decade.

“The San Francisco Fed put out a white paper about the benefits of negative interest rates. I hope that’s not where we’re going, but we can only cut rates about 225/250 bps to be at zero” — Kyle Bass, Hayman Capital Management.

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

What Happens When More QE Fails to Reverse the Recession?

What Happens When More QE Fails to Reverse the Recession?

The smart money is liquidating assets, paying off debt and moving capital into collateral that isn’t impaired by debt or speculative valuations.

The Federal Reserve’s sudden return to “accommodative” dovishness in response to the stock market’s swoon telegraphs its intent to fire up QE once the recession kicks into gear. QE (quantitative easing) are monetary policies designed to ease borrowing and the issuance of credit, and to prop up assets such as stocks and real estate.

The basic idea is that the Fed creates currency out of thin air and uses the new money to buy Treasury bonds and other assets. This injects fresh money into the financial system and lowers the yield on Treasury bonds, as the Fed will buy bonds at near-zero yield or even less than zero in pursuit of its policy goals of goosing assets higher and increasing borrowing/spending.

This is pretty much the Fed’s only lever, and it pulls this lever at any sign of weakness in stocks or the economy. That sets up an obvious question that few seem to ask: what happens when QE fails? What happens when the Fed launches QE and stocks fall as punters realize the rally is over? What happens when lowering interest rates doesn’t spark more borrowing?

What happens is the smart money sells everything that isn’t nailed down, a process that is arguably already well underway.

Why sell assets when QE has guaranteed gains in the past? Answer: exhaustion. There are limits to everything financial, and once those limits are reached, no amount of goosing will push the limits higher. Rather, further goosing only increases the fragility and vulnerability of the system.Price-earnings ratios only go so high before reversing, rents only go so high before reversing, and so on.

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

IMF Discreetly Preps Massive Aid Package For “Day After” Maduro’s Fall

IMF Discreetly Preps Massive Aid Package For “Day After” Maduro’s Fall

The International Monetary Fund is reportedly making plans for the “day after” embattled President Nicolas Maduro’s fall, according to Bloomberg. Though there’s been little momentum in military defections following US-backed opposition leader Juan Guaido’s offer of amnesty to any army officer that switches loyalties, Washington sanctions have effectively strangled state-owned PDVSA’s access to global markets. News of IMF maneuvering also comes amidst fresh reports the US is amassing aircraft, troops and armored vehicles on the Venezuelan border under the pretext of getting humanitarian aid into the country. 

The only significant cash flow that remains after the oil sanctions is through India, Venezuela’s second-biggest oil market after the United States, which still recognizes the Maduro government, and is now reportedly seeking to avoid purchases through US banks and even financial institutions with a heavy US presence. According to a Reuters report on Friday, “India has asked one buyer of Venezuelan oil to consider paying the South American nation’s national oil company PDVSA in a way that avoids the U.S. financial system, an Indian government source said, after Washington imposed fresh sanctions on Venezuela last month.”

Image source: Bloomberg

If oil buyers pay PDVSA through American institutions, US authorities can seize the funds. But the IMF reportedly sees cash dwindling from oil sales at such a rapid pace that Maduro can’t possibly hold on, even with the staying power of his loyal armed forces. This also comes as the White House mulls a possible next step of blocking foreign entities all together from dealing with the PDVSA. 

Citing an anonymous official due to the sensitivity of the matter, Bloomberg reports the IMF is planning for a near-term Maduro exit bydiscreetly preparing a massive financial aid package to rescue the nosediving economy, for years choked by US-led sanctions and corrupt socialist leadership, following transition of power.

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

Russians Told To “Prepare For Worst Outcome” As US Prepares New Sanctions

Russians Told To “Prepare For Worst Outcome” As US Prepares New Sanctions

A bipartisan team of US senators is preparing to hit Russia with additional sanctions over its 2016 US election interference and military operations in Syria and Ukraine.

Sens. Bob Menendez (D-N.J.) and Lindsey Graham (R-S.C.) are spearheading the measure, called the Defending American Security from Kremlin Aggression Act, which includes a wide range of financial penalties targeting Russia’s energy complex, financial industry and “political figures, oligarchs, and family members and other persons that facilitate illicit and corrupt activities, directly or indirectly, on behalf of Vladimir Putin,” reported The Independent.

Threats of the sanctions rocked Russian stock and government bond markets at the end of the week, and the country’s debt insurance costs jumped alongside FX volatility.

Moscow has responded to the prospect of new sanctions with anger.

A former minister told Russians to prepare for the worst outcome; the Kremlin accused the US of “racketeering.”

“We see clear symptoms of emotional Russophobia,” Kremlin spokesperson Dmitry Peskov told journalists. “But behind the emotions … is an entirely pragmatic, assertive trade calculation, and … nothing less than an attempt to engage in dishonest competition.”

Frants Klintsevich, a member of the Defence and Security Committee of Russia’s upper house, described the new sanctions as a “dangerous habit” similar to “smoking a pipe before breakfast, poisoning all those around.”

The head of Russia’s largest bank and its former economics minister, Herman Gref, warned that the sanctions could damage the already slowing economy.

 “We need to prepare for the very worst of situations,” Gref warned.

The sanction also includes support for NATO, including requiring a two-thirds majority in the Senate for the US to leave the alliance. It includes plans to make it easier to transfer military hardware to NATO countries to reduce their dependences on Russian arms.

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

Get Used to the “Powell Put”

Get Used to the “Powell Put”

In the land of the Federal Reserve and its market-manipulating mechanisms, there’s now an unofficial market term called the “Powell Put” or the “Powell Pivot.”

It is in direct reference to Fed chairman Jerome Powell. Before he became chairman, Wall Street referred to prior heads’ policies with terms like the “Greenspan Put” the “Bernanke Put” and the “Yellen Put.”

In layman’s terms, what the term means is that if the markets fall by too much, the Fed will swoop in and try to save the day, the month, or the year. A “put” in options terminology is insurance against a drop in prices. Nowadays, the “Powell Put” is the market’s insurance that the Fed will act to stimulate the markets if necessary.

Markets had been waiting for it to materialize. But Powell had previously talked about the need to raise rates to give the Fed “enough ammunition to fight the next crisis.” The size of the Fed’s balance sheet would also have to be reduced enough to provide it enough room to grow if needed.

Markets began to worry the Powell Put might never materialize when he raised interest rates in December, when the market was in the middle of a severe correction (that nearly culminated in a bear market). He also said the balance sheet reductions, or quantitative tightening, would run on “autopilot.”

Markets tanked on his comments. But then on Jan. 4, after stocks fell nearly 20%, the “Powell Put” finally materialized.

In comments addressing the American Economic Association, Powell said he was “prepared to adjust policy quickly and flexibly.”

And about the balance sheet reduction policy that was on autopilot in November, he said

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

Currencies threatened by a credit crisis

Currencies threatened by a credit crisis 

In this article I draw attention to the similarities between the current economic situation and that of 1929, and the threat to today’s unbacked currencies. There is the coincidence of trade protectionism with the top of the credit cycle, and there are the inflationary events that preceded it. The principal difference today is in modern macroeconomic delusions, which hold that regulating inflation of money and credit is the solution to all ills. I conclude that economic salvation can only come from ditching today’s macroeconomic theories and by returning to monetary stability through credible gold exchange standards.

Introduction

There is an assumption in economic circles that when the general level of prices changes, it is always due to changes in supply and demand for goods and services. Prices change all the time, but without a change in the public’s preference for or against holding money and with all else being equal, the general level of prices simply cannot change. Changes in the general level of prices are due to changes in the purchasing power of the money, which stems from the public’s preferences for or against it and do not emanate from goods and services.

This may not at first sight appear to matter, but it calls into question the widespread assumption that price changes are only due to changes in supply and demand for goods and services. It is a basic error behind modern monetary theory (MMT), whose supporters are busy reviving Georg Knapp’s Chartalist theories of money, the theories that permitted Bismarck’s inflationary pre-war armament financing and the subsequent collapse of the German currency in 1923. Believers in a divine right for the state to issue currency will not let themselves be distracted by inconvenient facts. MMT followers are only one group of neo-Keynesian inflationists, who are generally blind to the blunders of their revisionist economics.

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

The US Corporate Debt Bomb, Europe’s Recession, and Systemic Risk in China

The US Corporate Debt Bomb, Europe’s Recession, and Systemic Risk in China

Yesterday’s note caught a lot of attention.

In it, we argued that investing in stocks today based on the Fed getting dovish is like buying stocks after the Bear Stearns deal: you’re buying based on a development that reveals the financial system is in serious trouble.

Remember, the Fed didn’t become dovish for no reason… it because dovish because it sees systemic risk on the horizon.

Corporate America is perched atop a debt bomb of $10 trillion, of which roughly 1/3rd is junk… meaning unlikely to be paid back.

Rather than issuing debt to build factories or expand operations, these companies have been issuing debt to buy back shares, resulting in the system being MORE leveraged today than it was in 2007.

Over $700 billion of this debt comes due this year… at a time when 60% of US companies already have NEGATIVE cash flow.

Put another way, the debt is coming due at a time when most companies don’t have the money to pay it back.

Outside of the US, Europe is teetering on the brink of recession, with the latest industrial production numbers showing a year over year decline of 4.2%. This is the largest collapse since 2009, at the depth of the Great Financial Crisis.

Then there’s China, where despite claims to the contrary, the entire system is collapsing. The Central Bank of China just engaged in the largest liquidity pump of all time last month… meaning it spent MORE money propping up the system in January 2019 than it did at any point in 2008.

If things are fine in China, why is it doing this?

Again, structurally the global financial system is in SERIOUS trouble. Buying stocks today based on the idea that the Fed is not as hawkish as before is like buying stocks because of the Bear Stearns deal.

And deep down, the market knows it.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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