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In Tuesday’s technical update, I discussed the breakdown in the major markets both internationally as well as domestically. Of note, was the massive bear market in China which is currently down nearly 50 percent from its peak.

(Click to enlarge)

What is important about China, besides being a major trading partner of the U.S., is that their economy has been a massive debt-driven experiment from building massive infrastructure projects that no one uses; to entire cities that no one lives in. However, the credit-driven impulse has maintained the illusion of economic growth over the last several years as China remained a major consumer of commodities. Yet despite the Government headlines of economic prosperity, the markets have been signaling a very different story.

In the U.S., the story is much the same. Near-term economic growth has been driven by artificial stimulus, government spending, and fiscal policy which provides an illusion of prosperity. For example, the chart below shows raw corporate profits (NIPA) both before, and after, tax.

(Click to enlarge)

Importantly, note that corporate profits, pre-tax, are at the same level as in 2012. In other words, corporate profits have not grown over the last 6-years, yet it was the decline in the effective tax rate which pushed after-tax corporate profits to a record in the second quarter. Since consumption makes up roughly 70 percent of the economy, then corporate profits pre-tax profits should be growing if the economy was indeed growing substantially above 2 percent.

Corporate profitability is a lagging indicator of the economy as it is reported “after the fact.” As discussed previously, given that economic data in particular is subject to heavy backward revisions, the stock market tends to be a strong leading indicator of recessionary downturns.

Prior to 1980, the NBER did not officially date recession starting and ending points, but the market turned lower prior to previous recessions.

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

Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks

November 1, 2018

Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks

The Fed’s proposal marks one of the most significant rollbacks of bank regulations since Trump took office.

The Wall Street Journal reports Fed Proposes Looser Rules for Large U.S. Banks

The Federal Reserve announced one of the most significant rollbacks of bank rules since President Trump took office with a proposal for looser capital and liquidity requirements for large U.S. lenders.

The changes would affect large U.S. lenders including U.S. Bancorp , Capital One Financial Corp. , and more than a dozen others. The largest U.S. banks, including JPMorgan Chase & Co., wouldn’t see any significant rule changes, and some in the industry thought the proposal didn’t go far enough.

The draft proposal, approved by a 3-1 vote at a Wednesday meeting of the Fed’s governing board, would divide big banks into four categories based on their size and other risk factors. Regional lenders would be either entirely released from certain capital and liquidity requirements, or see those requirements reduced. They could also, in some cases, be subject to less frequent stress tests.

The proposals received a mixed reaction from banks. While some trade groups praised it, Greg Baer—president of the Bank Policy Institute, which represents large banks—said the proposal “does not do enough to tailor regulations.” He said, for instance, the plan doesn’t include changes to the Fed’s primary stress tests for big banks or to rules affecting foreign-owned banks with U.S. footprints. Fed officials said they were planning future proposal in those areas.

The plan divided the Fed, with Trump-appointed regulators and the Fed’s lone Obama-appointed official taking opposite sides. Fed Chairman Jerome Powell said the proposal would cut the regulatory burden “while maintaining the most stringent requirements for firms that pose the greatest risks.”

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

Peter Schiff Explains “What Happens Next” In 47 Words

October 12, 2018

Peter Schiff Explains “What Happens Next” In 47 Words

Outspoken critic of The Fed and one of the few that can see through the endless barrage of bullshit to how this really ends, has laid out in a tweet “what happens next”…

Likely sequence of events:

1. Bear market;

2. Recession;

3. Deficits explode;

4. Return of ZIRP and QE;

5. Dollar tanks;

6. Gold soars;

7. CPI spikes;

8. Long-term rates rise;

9. Fed. forced to hike rates during recession

10. A financial crisis without stimulus or bailouts!

h/t @PeterSchiff

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

October 8, 2018

The Global Distortions of Doom Part 1: Hyper-Indebted Zombie Corporations

The defaults and currency crises in the periphery will then move into the core.

It’s funny how unintended consequences so rarely turn out to be good. The intended consequences of central banks’ unprecedented tsunami of stimulus (quantitative easing, super-low interest rates and easy credit / abundant liquidity) over the past decade were:

1. Save the banks by giving them credit-money at near-zero interest that they could loan out at higher rates. Savers were thrown under the bus by super-low rates (hope you like your $1 in interest on $1,000…) but hey, bankers contribute millions to politicos and savers don’t matter.

2. Bring demand forward by encouraging consumers to buy on credit now.Nothing like 0% financing to incentivize consumers to buy now rather than later. Since a mass-consumption economy depends on “growth,” consumers must be “nudged” to buy more now and do so with credit, since that sluices money to the banks.

3. Goose assets based on interest rates by lowering rates to near-zero. Bonds, stocks and real estate all respond positively to declining interest rates. Corporations that can borrow money very cheaply can buy back their shares, making insiders and owners wealthier. Housing valuations go up because buyers can afford larger mortgages as rates drop, and bonds go up in value with every notch down in yield.

This vast expansion of risk-assets valuations was intended to generate a wealth effectthat made households feel wealthier and thus more willing to binge-borrow and spend.

All those intended consequences came to pass: the global economy gorged on cheap credit, inflating asset bubbles from Shanghai to New York to Sydney to London. Credit growth exploded higher as everyone borrowed trillions: nation-states, local governments, corporations and households.

While much of the hot money flooded into assets, some trickled down to the real economy, enabling enough “growth” for everyone to declare victory.

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

The Everything Bubble: When Will It Finally Crash?

September 26, 2018

The Everything Bubble: When Will It Finally Crash?

Much like the laws of physics, there are certain laws of economics that remain constant no matter how much manipulation exists in the markets. Expansion inevitably leads to contraction, and that which goes up must eventually come down. Central banks understand this reality very well; they have spent over a century trying to exploit those laws to their own advantage.

A common misconception among people new to alternative economics is the idea that central banks only seek to keep the economy afloat, or keep it expanding forever. In reality, these institutions and the money elites behind them artificially inflate financial bubbles only to deliberately implode them at opportunistic moments.

As I have outlined in numerous articles, every economic bubble and subsequent crash since 1914 can be linked to the policy actions of central bankers. Sometimes they even admit to culpability (to a point), as Ben Bernanke did on the Great Depression and as Alan Greenspan did on the 2008 credit crisis. You can read more about this in my article ‘The Federal Reserve Is A Saboteur – And The “Experts” Are Oblivious.’

Generally, central bankers and international bankers mislead the public into believing that the crashes they are responsible for were caused “by mistake.” They rarely if ever mention the fact that they often use these crises as a means to consolidate control over assets, resources and governments while the masses are distracted by their own financial survival. Centralization is the name of the game. It is certainly no mistake that after every economic implosion the wealth gapbetween the top 0.01% and the rest of humanity widens exponentially.

Yet another crash is being weaponized by the banks, and this time I believe the motivations behind it are rather different. Or at least the goals are supercharged.

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

Once the Bubbles Pop, We’re Broke

August 31, 2018

Once the Bubbles Pop, We’re Broke

I hate to break it to you, but the everything bubble isn’t permanent.

OK, I get it–the Bull Market in stocks is permanent. Bulls will be chortling in 2030 that skeptics have been wrong for 22 years–an entire generation. Bonds will also be higher, thanks to negative interest rates, and housing will still be climbing higher, too. Household net worth will be measured in the gazillions.

Here’s the Fed’s measure of current household net worth: a cool $100 trillion, about 750% of disposable personal income (DPI):

Household net worth has soared $30 trillion in the past decade of permanent monetary and fiscal stimulus. No wonder everyone is saying Universal Basic Income (UBI)– $1,000 a month for every adult, no questions asked–is affordable, along with Medicare For All (never mind that Medicare is far more expensive than the healthcare provided by other advanced nations due to rampant profiteering, fraud and paperwork costs–we can afford it!)

And we get to keep the Endless Wars ™, trillion-dollar white elephant F-35 program, and all the other goodies–we can afford it all because we’re rich!

We’re only rich until the bubbles pop, which they will. All speculative bubbles deflate, even those that are presumed permanent, And when the current everything bubble pops, net worth–and all the taxes generated by bubble-era capital gains–vanish.

Take a look at the Federal Reserve’s Household Balance Sheet (June 2018):
$34.6 trillion in non-financial assets
$81.7 trillion in financial assets
$15.6 trillion in total liabilities ($10 trillion of which is home mortgages)
$100 trillion in net worth

So $25 trillion is in real estate. When the housing bubble pops, $10 trillion will go poof. Maybe $12 trillion, but why quibble about a lousy $2 trillion? We’re rich!

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

Ben Bernanke: The US Economy Is Going To Go Off The Cliff In 2020

June 8, 2018

Ben Bernanke: The US Economy Is Going To Go Off The Cliff In 2020

It looks like Ben Bernanke is a Bridgewater client.

Recall that earlier this week we reported that in the May 31 “Daily Observations” letter to select clients, authored by Bridgewater co-CIO Greg Jensen, the world’s biggest hedge had an ominous, if not dire appraisal of the current economic and financial situation facing the US, and concluded that “We Are Bearish On Almost All Financial Assets”

While Ray Dalio’s co-Chief Investment Officer listed several specific reasons for his unprecedented bearishness, noting that “markets are already vulnerable as the Fed is pulling back liquidity and raising rates, making cash scarcer and more attractive”, pointing out that “options pricing reflects little investor demand for protection against the potential for the economy to bubble over and also shows virtually no chance of deflation, which is a high likelihood in the next downturn”, what really spooked Bridgewater is what happens in 2020 when the impact from the Trump stimulus peaks, and goes into reverse. This is what Jensen wrote:

“while such strong conditions would call for further Fed tightening, there’s almost no further tightening priced in beyond the end of 2019. Bond yields are not priced in to rise much, implying that the yield curve will continue to flatten. This seems to imply an unsustainable set of conditions, given that government deficits will continue growing even after the peak of fiscal stimulation and the Fed is scheduled to continue unwinding is balance sheet, it is difficult to imagine attracting sufficient bond buyers with the yield curve continuing to flatten.”

The result was the hedge fund’s now infamous conclusion:

“We are bearish on financial assets as the US economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop.”

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

Albert Edwards on Trump’s Legacy:15% Deficits then a Deflationary Bust

February 17, 2018

Albert Edwards on Trump’s Legacy:15% Deficits then a Deflationary Bust

Albert Edwards at Society General does not have kind words for Trump’s stimulus package.

In his latest Email, Albert Edwards at Society General fires a shot at Trump’s tax cut.

Edwards says the “fiscal expansion is probably the most foolhardy escapade in modern economic policy, and the timing of the fiscal stimulus that is utterly ridiculous and will only accelerate the collapse of US financial markets as the Fed hikes rates even more quickly.”

I doubt this is the most foolhardy expansion in history, but it is reckless and ill-timed.

Here are a few clips from Edwards.

After some eighteen months of surprising to the downside, US wage and price inflation are rising briskly, putting intense downward pressure on financial markets. Yet another Fed-inspired financial Ponzi scheme now looks set to collapse into the deflationary dust. But the post-mortem will identify President Trump’s ludicrously timed fiscal stimulus as a key trigger for the collapse. A 15% deficit will be his legacy.

Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history. To say it is ill-timed and ill-judged would be a massive understatement.

The outcome of this front-end loaded stimulus package is patently obvious. It will rapidly accelerate the end of the economic cycle.

Tim Lee of pi Economics opined recently on why the VIX will struggle to regain the very low levels of a couple of weeks back. “We are much further into the cycle of what might be thought of as an underlying tightening of monetary conditions. The Fed is contracting its balance sheet and raising interest rates. On top of that … US imbalances are worsening with the personal savings rate set to fall to a new low while US government finances deteriorate further. Nominal and real bond yields are rising.”

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

Caution: Slowdown

November 11, 2017

Caution: Slowdown

Many of you know I keep posting charts keeping taps on the macro picture in the Macro Corner. It’s actually an interesting exercise watching what they do versus what they say. Public narratives versus reality on the ground.

I know there’s a lot of talk of global synchronized expansion. I call synchronized bullshit.

Institutions will not warn investors or consumers. They never do. Banks won’t warn consumers because they need consumers to spend and take up loans and invest money in markets. Governments won’t warn people for precisely the same reason. And certainly central banks won’t warn consumers. They are all in the confidence game.

Well, I am sending a stern warning: The underlying data is getting uglier. Things are slowing down. And not by just a bit, but by a lot. And I’ll show you with the Fed’s own data that is in stark contrast to all the public rah rah.

Look, nobody wants recessions, They are tough and ugly, but our global economy is on based on debt and debt expansion. Pure and simple. And all that is predicated on keeping confidence up. Confident people spend more and growth begets growth.

But here’s the problem: Despite all the global central bank efforts to stimulate growth real growth has never emerged. Mind you all this is will rates still near historic lows:

And central banks supposedly are reducing the spigots come in 2018:

I believe it when I see it. In September the FED told everyone they would start reducing their balance sheet in October. It’s November:

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

Is There Any Way Out of the ECB’s Trap?

November 10, 2017

Is There Any Way Out of the ECB’s Trap?

The ECB faces the Devil’s Alternative that Frederick Forsyth mentioned in one of his books. All options are potentially riskly. Mario Draghi knows that maintaining the so-called stimuli involves more risks than benefits, but also knows that eliminating them could make the eurozone deck of cards collapse.

Despite the massive injection of liquidity, he knows that he can not disguise political risks such as the secessionist coup in Catalonia. The Ibex reflects this, making it clear that the European Central Bank does not print prosperity, it only puts a floor to valuations.

The ECB wants a weak euro. But it is a game of juggling to pretend a weak euro and at the same time a strong economy. The European Union countries export mostly to themselves. Member countries sell more than two-thirds of their goods and services to other countries in the eurozone. Therefore, the more they export and their economies recover, the stronger the euro, and with it, the risk of losing competitiveness. The ECB has tried to break the euro strength with dovish messages, but it has not worked until political risk reappeared. With the German elections and the prospect of a weak coalition, the results of the Austrian elections and the situation in Spain, market operators have realized – at last – that the mirage of “this time is different “in the European Union was simply that, a mirage.

A weak euro has not helped the EU to export more abroad. Non-EU exports from the member countries have been stagnant since the monetary stimulus program was launched, even though the euro is much weaker than its basket of currencies compared to when the stimulus program began. The Central Bank Trap, which I explain in my new book.

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

Surplus or Stimulus

April 25, 2017

Surplus or Stimulus

René Magritte Le Cri du Coeur 1960

Austerity is over, proclaimed the IMF this week. And no doubt attributed that to the ‘successful’ period of ‘five years of belt tightening’ a.k.a. ‘gradual fiscal consolidation’ it has, along with its econo-religious ilk, imposed on many of the world’s people. Only, it’s not true of course. Austerity is not over. You can ask many of those same people about that. It’s certainly not true in Greece.

IMF Says Austerity Is Over

Austerity is over as governments across the rich world increased spending last year and plan to keep their wallets open for the foreseeable future. After five years of belt tightening, the IMF says the era of spending cuts that followed the financial crisis is now at an end. “Advanced economies eased their fiscal stance by one-fifth of 1pc of GDP in 2016, breaking a five-year trend of gradual fiscal consolidation,” said the IMF in its fiscal monitor.

In Greece, the government did not increase spending in 2016. Nor is the country’s era of spending cuts at an end. So did the IMF ‘forget’ about Greece? Or does it not count it as part of the rich world? Greece is a member of the EU, and the EU is absolutely part of the rich world, so that can’t be it. Something Freudian, wishful thinking perhaps?

However this may be, it’s obvious the IMF are not done with Greece yet. And neither are the rest of the Troika. They are still demanding measures that are dead certain to plunge the Greeks much further into their abyss in the future. As my friend Steve Keen put it to me recently: “Dreadful. It will become Europe’s Somalia.”

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

The Long Run Economics of Debt Based Stimulus

March 19, 2017

The Long Run Economics of Debt Based Stimulus

Onward vs. Upward

Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired.

What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only cleared her throat (if quite audibly, in 2008) and hasn’t really sung yet, it is already clear that calling this system careening toward a catastrophic failure.

Here is the United States, since the turn of the new millennium (starting January 1, 2001) real GDP has increased from roughly $10.5 trillion to $18.6 trillion, or 77 percent. Over this same time government debt has spiked nearly 250 percent from about $5.7 trillion to $19.9 trillion. Obviously, some sort of reckoning’s in order to bring the books back into balance.

Throughout this extended episode of economic and financial discontinuity, the government’s solution to jump-starting the economy has been to borrow money and spend it. Thus far, these efforts have succeeded in digging a massive hole that the economy will somehow have to climb out of. We’re doubtful such a feat will ever be attained.

In short, additions of government debt over this time have been at a diminishing return. Specifically, at the start of the new millennium the debt to GDP ratio was about 54 percent. Today, it’s well over 100 percent.

US GDP and US federal debt, indexed (1984 = 100). Mises noted back in the late 1940s already that “it is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”

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

Why the Coming Wave of Defaults Will Be Devastating

September 22, 2016

Why the Coming Wave of Defaults Will Be Devastating

Without the stimulus of ever-rising credit, the global economy craters in a self-reinforcing cycle of defaults, deleveraging and collapsing debt-based consumption.

In an economy based on borrowing, i.e. credit a.k.a. debt, loan defaults and deleveraging (reducing leverage and debt loads) matter. Consider this chart of total credit in the U.S. Note that the relatively tiny decline in total credit in 2008 caused by subprime mortgage defaults (a.k.a. deleveraging) very nearly collapsed not just the U.S. financial system but the entire global financial system.

Every credit boom is followed by a credit bust, as uncreditworthy borrowers and highly leveraged speculators inevitably default. Homeowners with 3% down payment mortgages default when one wage earner loses their job, companies that are sliding into bankruptcy default on their bonds, and so on. This is the normal healthy credit cycle.

Bad debt is like dead wood piling up in the forest. Eventually it starts choking off new growth, and Nature’s solution is a conflagration–a raging forest fire that turns all the dead wood into ash. The fire of defaults and deleveraging is the only way to open up new areas for future growth.

Unfortunately, central banks have attempted to outlaw the healthy credit cycle.In effect, central banks have piled up dead wood (debt that will never be paid back) to the tops of the trees, and this is one fundamental reason why global growth is stagnant.

The central banks put out the default/deleveraging forest fire in 2008 with a tsunami of cheap new credit. Central banks created trillions of dollars, euros, yen and yuan and flooded the major economies with this cheap credit.

They also lowered yields on savings to zero so banks could pocket profits rather than pay depositors interest. This enabled the banks to rebuild their cash and balance sheets– at the expense of everyone with cash, of course.

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

China’s Furious Stimulus-and-Debt Binge Backfires

May 3, 2016

China’s Furious Stimulus-and-Debt Binge Backfires

Fabled transition to a service economy? Forget it.

The export and manufacturing powerhouse of the world, the locomotive – along with the US – of the global economy, and an indicator of the global economy itself, disappointed economists once again. The operative word in the media today is “unexpectedly.”

China has been on an glorious debt-and-stimulus binge for the past few months. New corporate borrowing shot up to record levels as the People’s Bank of China opened all valves, and juice rushed through the state-owned megabanks to corporate borrowers and others all around.

In the first quarter, total debt ballooned by 6.2 trillion yuan (nearly $1 trillion), the largest quarterly jump ever, to a record 163 trillion yuan ($25 trillion), or 237% of GDP, up from 148% of GDP in 2007, according to some of the more benign estimates. Others peg total debt as high as 282% of GDP. Corporate debt alone is now estimated at 160% of GDP. But no one knows for sure. With the Chinese economy, everyone is groping in the dark.

It’s not the debt itself that scares observers, but the speed with which this debt has ballooned. It’s impossible to invests this sort of moolah this quickly in productive activities whose proceeds would allow for this debt to be serviced [read… China’s “Lehman Moment” or Decades of Japan-Style Stagnation?].

Economists thought that this stimulus-and-debt binge would actually perk up manufacturing, boost services, and end China’s economic malaise, the extent of which remains unknown because no one, not even the Chinese leadership, trusts the official numbers according to which the economy grew 6.7% in the first quarter. Inflated as that number may be, it’s the slowest growth since 2009.

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

Danish Central Bank Warns Of “Risk Illusion”, Fears “Fire Sale” Plunge In Asset Prices

April 2, 2016

Danish Central Bank Warns Of “Risk Illusion”, Fears “Fire Sale” Plunge In Asset Prices

Having slashed rates below zero and unleashed various rounds of asset-purchases, the Riksbank (Denmark’s central bank) recently warned the rest of the world that “we have reached the limits of monetary policy.” Now, however, Denmark’s Systemic Risk Council has raised the financial system warning level to DEFCON1, warning that low levels of interest rates have led to excessive risk-taking and risk illusion among borrowers and credit institutions… and low market liquidity combijed with sudden shifts in risk perceptions may still lead to significant falls in asset prices and fire sales.

With so many of the world’s nations going NIRP…

At least one of the world’s central banks is worried about it…

The Systemic Risk Council has held its thirteenth meeting.

Sudden changes in risk perception in the financial markets combined with low market liquidity may still lead to significant falls in asset prices and fire sales. Due caution should be exerted in relation to the low level of interest rates, which may lead to excessive risk-taking and risk illusion among borrowers and credit institutions.

There may be systemic risks associated with a sudden change in risk perception in the financial markets combined with low market liquidity

Recent months have seen a partial materialisation of the risk of a rapid and marked fall in asset prices in some of the global financial markets. The large fluctuations in the financial markets in early 2016 have not had systemic consequences in Denmark. Sudden changes in the perception of risk in the financial markets combined with low market liquidity may still lead to significant falls in asset prices and fire sales. The Council’s observation of 30 September 2014 regarding low interest rates and build-up of systemic risks still applies.

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

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