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We’re way overdue for a sell-everything recession, one that the Fed will only make worse by pursuing its usual policies of lowering interest rates and goosing easy money.

As I noted last week, central banks, like generals, always fight the last war–until the war is lost. The global economy is careening into recession (call it a “slowdown” if you are employed by the Corporate-State Media), and while we don’t yet know just how deep and wide this recession will be, we can make an educated guess that it won’t be a repeat of any of the previous five recessions: 1973-74, 1981-82, 1990-91, 2001-02 or 2008-09.

Recessions triggered by energy or financial crises tend to be short and shallow as the crisis soon eases; recessions caused by structural imbalances tend to be enduringly brutal. Many recessions are structural, but the triggering event is a short-term crisis.Some recessions savage specific sectors but leave most of the economy relatively unscathed. Others disrupt virtually everything, even the generally impervious-to-recession government sector.

Let’s run down the general outlines of the previous five recessions. If you’ve lived long enough, you’ve experienced the suffering firsthand. Younger readers will have difficulty relating firsthand, but understanding the dynamics is the goal here, and so direct experience is a bonus, not an essential.

1973-74: the Oil Shock to the U.S. economy as OPEC raised prices and punished the U.S. for supporting Israel in the 1973 Yom Kippur war created havoc–long lines at gas stations and a sharp downturn (a.k.a. recession). Though the economy supposedly recovered statistically in 1975, the structural issues that were laid bare by the recession continued eroding the economy for the next six years.

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

Blain’s Morning Porridge – 11th February 2019

February 11, 2019

Blain’s Morning Porridge – 11th February 2019

“A little bit of an altercation in the scrum, they’ll be laughing at that in Hawick.”

What a fascinating world we live in.

Amazon boss Jeff Bezos exposing himself, and exposes the National Inquirer for attempted blackmail. A young senator, Alexandria Ocasio-Cortez, snaring the headlines and proposing a preposterous New Green Deal – while further splitting the Democrats. Europe plunging back into recession. The UK no closer to a Brexit Deal (hang-on, that’s not a headline… that’s just… normal..) Deutsche Bank paying up to demonstrate it can borrow in markets. Santander facing a Euro 50 bln breach of promise lawsuit from Andreas Orcel (proving the Spanish banking adage: At Santander – you are either a Botin or a.. servant..) So much out there…

Are all these things linked? Yes – the world we live in determines the functionality of global markets. You might believe Washington Post owner Jeff Bezos was the victim of an Inquirer effort to “catch and kill” a story the paper has on Mr Trump’s activities in Moscow, or you might believe Deutsche Bank’s problems are part of a deeper malaise across European banking. Whatever… the news changes our perceptions.

The trick is too separate the chaos of new flow from the tau of markets. Markets are linear functions of buy/sell – they are not necessarily about common sense. To illustrate: last week I wrote about Italy, pointing out just how hopelessly its ensnared and entrapped within the straight-jacket of the Euro, with little prospect of growth, employment or upside.

Yet Italian bonds are one of the top performing assets – AND WILL REMAIN SO – because the ECB can’t afford to let Italy go, and Europe sliding back into downturn pretty much ensures they’ll continue to bailout Italy and likely resurrect QE in some form – watch out for something like long-term repos.

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

The next recession could force the Fed to cut interest rates into negative territory. Here’s what that means, and how it could affect you.

February 8, 2019

The next recession could force the Fed to cut interest rates into negative territory. Here’s what that means, and how it could affect you.

Federal Reserve Chairman Jerome Powell takes the oath of office administered by Federal Reserve Board member Randal Quarles at the Federal Reserve in Washington, U.S., February 5, 2018. REUTERS/Aaron P. Bernstein/File Photo — Federal Reserve Chairman Jerome Powell taking the oath of office.

The San Francisco Federal Reserve recently published a paper indicating that an unprecedented policy step, if adopted, would have helped the economy recover more quickly from the most recent financial crisis.
With the next recession looming, a prominent Wall Street strategist thinks the unpopular tool will be needed to combat it.

The Federal Reserve’s extraordinary efforts to combat the Great Recession more than a decade ago raised many concerns about what tools it would have left to fight the next crisis.

One measure that was floated, but largely passed off as improbable, was the use of negative interest rates. The Fed already did the unusual and held its Fed funds rate — the benchmark for all other borrowing costs — near zero from 2009 through 2015. This made it sufficiently cheaper for companies and consumers to access credit and rebuild the battered economy.

Anything below zero, however, was once considered unthinkable. After all, a negative interest rate means that, for example, savers actually pay banks to hold their money instead of earning interest.

The mainstream discussion on negative rates has quieted down for a while since Sweden became the first country to cut rates below zero in 2015. But a recent paper from the San Francisco Fed, coupled with widespread concerns about an economic slowdown, are returning the concept to the forefront.

Vasco Cúrdia, the research adviser who wrote the paper, examined what would have happened had the Fed adopted a negative-interest-rate policy during the most recent recession.

“Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential,” he said.

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

Fed Will Crash Markets & Dollar, Gold Protects – John Williams

January 27, 2019

Fed Will Crash Markets & Dollar, Gold Protects – John Williams

Economist John Williams warns the Federal Reserve has painted itself into a very tight no win corner. No matter what the Fed does with rates it’s going to be a disaster. Williams explains, “You had some very heavy selling towards the end of the year and when you saw the big declines in the stock market you also saw that accompanied by a falling dollar and rising gold prices. That was foreign capital which was significant fleeing our markets. So if the Fed continues to raise interest rates, and they want to do and they still don’t have rates where they want them, it’s going to intensify the economic downturn. That’s going to hit the stock market. If they stop raising rates . . . and they have to go back to some sort of quantitative easing, that’s going to hit the dollar hard. Foreign investors are going to say the dollar is going to get weaker and let’s get out of the dollar. Then, you are going tom see heavy selling in the stock market. So either way they go, they created a conundrum for themselves because of the way they bailed out the banking system (in 2008-2009). At this point they don’t have an easy way out of this.”

Williams says the U.S. is already entering into a recession. Williams contends, “The first quarter, which is the quarter we are in right now, the first quarter of 2019 likely will be in contraction partially due to the government shutdown. That is slowing the economy on top of the interest rate hikes, but the cause of the recession here is not the government shutdown. It’s the Fed hiking rates . . . the fundamental driving factor that was putting us into recession even before the government shutdown was the rapid rise in interest rates.”

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

A Recession Survival Guide

January 26, 2019

A Recession Survival Guide

The funny thing about slashing your budget to survive a recessionary storm is that it works wonders whether the recession is deep or shallow.

We know that after 10 years of expansion, a recession is baked in. Trees don’t grow to the moon, etc.

We also know that some people will hardly notice the recession while others are devastated. I addressed this in The Recession Will Be Unevenly Distributed(January 10, 2019). A retiree on Social Security and a bit of income from Treasury bonds isn’t going to be affected much, and a power couple in Washington DC who are high up the food chain in the federal government will also shrug off the recession.

What we don’t know is what kind of recession we’re going to get. It’s been almost 40 years since the U.S. experienced a “real recession,” i.e. a downturn that was severe and not limited to narrow slices of the economy.

The recession of 2008-09 was over before it started, and the damage was largely limited to the speculative housing-mortgage sectors and finance and everyone who was over-leveraged in the housing market.

The recession of 2000-02 was limited to the tech sectors that were exposed to the dot-com meltdown and investors in speculative dot-com companies.

The recession of 1991-92 was brief and shallow by historical standards.

The “real recession” of 1981-82 laid waste to numerous sectors and spread devastation throughout the economy. Interest-sensitive industries were crushed, and this impacted sectors such as government that are typically impervious to recessions.

Even further back, the Oil Shock recession of 1973-74 was also an economy-wide upheaval.

Those pundits who aren’t denying a recession is baked in are busy assuring us it will be a mere slowdown. What the well-paid pundits of the status quo can’t or won’t discuss is the economy’s fragility and vulnerability to self-reinforcing declines.

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

The Next Recession: What It Could Look Like

January 21, 2019

The Next Recession: What It Could Look Like

With the New Year and the US recovery soon to be record-breaking in duration, many are asking when the next recession is likely to come and what will cause it. While none of us has a crystal ball that gives a clear view of the future, there are a few things we can say.

First, and most importantly, the next recession will not look like the last recession. The last recession was caused by the collapse of a massive housing bubble that had been the driving force in the previous recovery. While economists like to pretend this was an unforeseeable event, that is not true.

There was an unprecedented run-up in nationwide house prices. It was clear that this was not being driven by the fundamentals of the housing market, as there was no remotely corresponding increase in rents, and vacancy rates were hitting record levels.

Furthermore, it was easy to see the housing bubble was driving the economy. Residential construction was hitting record shares of GDP, more than two full percentage points above its long-term average of 4.0 percent of GDP.

The wealth created by the bubble was also leading to a consumption boom, as people spent based on the new equity created by the run-up in the price of their home. This was also easy to see in the data, as the ratio of consumption-to-income hit record levels.

This history is important to review because many analysts are looking for the next recession to be a replay of the 2008 crash. If we pretend that the bursting of the housing bubble and subsequent downturn was an unforeseeable event, then there could be other unforeseen events that will sink the economy. For this reason, it is necessary to point out that the 2008 collapse was entirely foreseeable, economists just ignored the evidence that was visible to anyone who examined the economy with open eyes.

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

The Last Two Times This Happened, A Crisis Hit Within 6 Months

January 15, 2019

The Last Two Times This Happened, A Crisis Hit Within 6 Months

As I keep warning, the global economy is rapidly moving into a recession.

If you don’t believe me, consider that in the last two weeks, the following have been announced…

1) South Korean exports, a critical measure for global growth, recorded a -1.2% drop year over year in December.

2) China’s manufacturing PMI fell into outright contraction below 50. Car sales were negative for the first time in two decades. And Chinese exports fell 4.4% year over year.

3) German Industrial Production fell 1.9% month over month and 4.6% year over year in November: the biggest drop since 2009. Real-time GDP trackers show the largest EU economy is already in a recession.

4) US manufacturing ISM dropped sharply from 59% to 54% (not yet in contraction mode, but rapidly approaching it).

To top if off, we now have numerous companies issuing warnings: Apple, Samsung, LG, Fed Ex, Delta, Skyworks, Tailored Brand, Sherwin-Williams, Lindt, Macy’s, Kohl’s, and American Airlines have all lowered forward guidance.

So we’ve got everything from airlines to big tech to chocolate producers and paint manufacturers warning of a slowdown.

This is the slowdown that stocks began to discount in October.

Unfortunately it’s not over either. If you look at the long-term charts, it’s clear the market realizes that the credit cycle has turned and we are moving into a recession/ crisis.

The last two times this happened, a crisis hit within three to six months.

Collapse In Global M1 Signals A Worldwide Recession Has Arrived

January 14, 2019

Collapse In Global M1 Signals A Worldwide Recession Has Arrived

By now everyone has seen some iteration of this chart showing that the annual change in central bank liquidity is now negative.

Another way to visualize just the Fed’s balance sheet contraction is courtesy of this chart from Morgan Stanley which shows specifically which assets – Treasurys and MBS – are declining on a monthly basis.

When it comes to markets – where the events of December were a vivid reminder that just as QE blew the world’s biggest asset bubble, so QT will deflate it – there is a simple explanation of this negative effect of QT on Markets – in terms of both flow and stock – and it is laid out as follows from Morgan Stanley:

THE STOCK EFFECT (SE) – GROUP 1
- The SE relates to the long-term impact on Group 1 asset prices from the overall change to the central bank’s balance sheet and its impact on the stock of available Group 1 assets.
THE FLOW EFFECT (FE) – GROUP 1
- The FE relates to the short-term impact on Group 1 asset prices from each flow that changes the size of the central bank’s balance sheet.
THE PORTFOLIO BALANCE CHANNEL EFFECT (PBCE) – GROUP 1 AND 2
- The PBCE impacts both Group 1 and Group 2 assets and incorporates the pricing elements of both the stock effect and the flow effect.

But while the immediate effect of the expansion and shrinkage of the Fed’s balance sheet on various asset classes is rather intuitive – if not to Fed presidents of, course – a more pressing question is how will the upcoming liquidity shrinkage affect the global economy.

Unfortunately, the answer appears to be ominous.

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

Risks to the Global Economy in 2019

January 12, 2019

Risks to the Global Economy in 2019

Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change. They will include a growth recession in China, a rise in global long-term real interest rates, and a crescendo of populist economic policies.

CAMBRIDGE – As Mark Twain never said, “It ain’t what you don’t know that gets you into trouble. It’s what you think you know for sure that just ain’t so.” Over the course of this year and next, the biggest economic risks will emerge in those areas where investors think recent patterns are unlikely to change. They will include a growth recession in China, a rise in global long-term real interest rates, and a crescendo of populist economic policies that undermine the credibility of central bank independence, resulting in higher interest rates on “safe” advanced-country government bonds.1

A significant Chinese slowdown may already be unfolding. US President Donald Trump’s trade war has shaken confidence, but this is only a downward shove to an economy that was already slowing as it makes the transition from export- and investment-led growth to more sustainable domestic consumption-led growth. How much the Chinese economy will slow is an open question; but, given the inherent contradiction between an ever-more centralized Party-led political system and the need for a more decentralized consumer-led economic system, long-term growth could fall quite dramatically.1

Unfortunately, the option of avoiding the transition to consumer-led growth and continuing to promote exports and real-estate investment is not very attractive, either. China is already a dominant global exporter, and there is neither market space nor political tolerance to allow it to maintain its previous pace of export expansion. Bolstering growth through investment, particularly in residential real estate (which accounts for the lion’s share of Chinese construction output) – is also ever more challenging.1

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

Europe Likely in Recession Now: Germany, France, Italy Production Collapsed

January 12, 2019

Europe Likely in Recession Now: Germany, France, Italy Production Collapsed

German, French, and Italian industrial production collapsed in November. Italy GDP is negative for 3rd Quarter.

Italy GDP

Italy’s GDP was negative for the third quarter. Gross domestic product (GDP) in the euro zone’s third largest economy fell by 0.1 percent in July-September due to weaker domestic demand, statistics bureau ISTAT said, the first decline since the second quarter of 2014.

Based on industrial production, Germany and France will soon follow.

Germany Industrial Production

Analysts actually expected German IP to rise. Go figure.

German industrial output fell unexpectedly by 1.9 percent month-on-month in November 2018, missing market expectations of a 0.3 percent rise and following an upwardly revised 0.8 percent drop in October.

France Industrial Production

France’s industrial production fell 1.3 percent from a month earlier in November 2018, reversing an upwardly revised 1.3 percent growth in October and missing market expectations of a 0.2 percent gain.

Italy Industrial Production

Italy’s industrial production slumped 1.6 percent from a month earlier in November 2018, much worse than market expectations of a 0.3 percent decline and following a meager 0.1 percent gain in October.

Brink of Recession or Already In Recession?

The Telegraph asks Is Germany – and the Eurozone – On the Brink of Recession?

The water levels of the Rhine are low and Germany may be flirting with recession. The two are connected, many argue. The Rhine is a key artery for the transport of many goods into and through the country, particularly for the chemicals and energy industries.

But praying that the water rises and all will come good might not be enough. Just as the idea that negative growth in the third quarter was due to the temporary hit of emissions testing rules on an already troubled car industry, the one-off excuses are starting to wear a bit thin. There is a grander slowdown facing Berlin, and, as the eurozone’s economic powerhouse, potentially the rest of its members too.

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

Peter Schiff: This Is the Beginning of a Much Bigger Crisis (Video)

January 11, 2019

Peter Schiff: This Is the Beginning of a Much Bigger Crisis (Video)

Wall Street has been on a roller coaster ride over the last few months. If you listen to the pundits on the financial networks, you’ll hear the word “volatile” used over and over again. That word certainly seems to describe the current state of US stock markets and in a broader sense the economy. But during a recent interview on RT News with Rick Sanchez, Peter Schiff said it’s not that the economy is volatile. It’s actually a bubble. And we are on the verge of a bigger crisis than the one we went through in 2008.

It’s not a volatile economy, it’s a bubble economy. Thanks to the Federal Reserve, they inflated an even bigger bubble, on purpose, than the one they inflated by accident that popped in 2008. And so the economy is in much worse shape structurally today then it was before it fell apart the last time. So, this is the beginning of a much greater crisis, of a much greater recession than the one that we experienced back in 2008.”

Sanchez asked Peter what exactly the Federal Reserve did wrong. Peter said, basically, everything.

But the biggest things they did wrong were lowering interest rates down to zero, practically, and leaving them there for pretty much the entirety of the Obama presidency. And then they’ve barely raised them. They’re still at 2%, which is very low. They also did all the quantitative easing where they printed a bunch of money and bought US government bonds and mortgage bonds. That enabled the housing bubble to reflate, and that enabled the US government to go much deeper into debt. So, the government didn’t cut spending, which is what we needed. They increased spending. But it also enabled corporations to lever up and buy stocks.

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

Is an Increase in Demand Key for Economic Growth?

January 11, 2019

IS AN INCREASE IN DEMAND KEY FOR ECONOMIC GROWTH?

Whenever the so-called economy shows signs of weakness most experts are of the view that what is required to prevent the economy sliding into recession is to boost the overall demand for goods and services.

If the private sector fails to increase its demand then it is the role of the government to fill this void.

Following the ideas of Keynes and Friedman, most experts associate economic growth with increases in the demand for goods and services.

Both Keynes and Friedman felt that the great depression of the 1930’s was due to an insufficiency in aggregate demand and thus the way to fix the problem was to boost aggregate demand.

For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman on the other hand advocated that the Federal Reserve pump more money to revive demand.

There is however never such a thing as insufficient demand as such. We suggest that an individual’s demand is constrained by their ability to produce goods. The more goods that an individual can produce the more goods he can demand i.e. acquire.

Note that the production of one individual enables him to pay for the production of another individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).

Observe that demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.

In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require ie. consume.

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

The Recession Will Be Unevenly Distributed

January 10, 2019

The Recession Will Be Unevenly Distributed

Those households, enterprises and organizations that have no debt, a very low cost basis and a highly flexible, adaptable structure will survive and even prosper.

The coming recession will be unevenly distributed, meaning that it will devastate many while leaving others relatively untouched. A few will actually do better in the recession than they did in the so-called “recovery.”

I realize many of the concepts floated here are cryptic and need a fuller explanation: the impact of owning differing kinds of capital, fragmentation, asymmetry, opacity, etc. ( 2019: Fragmented, Unevenly Distributed, Asymmetric, Opaque).

These dynamics guarantee a highly uneven distribution of recessionary consequences and whatever rewards are generated will be reaped by a few.

One aspect of the uneven distribution is that sectors that were relatively protected in recent recessions will finally feel the impact of this one. Large swaths of the tech sector (which is composed of dozens of different industries and services) that were devastated in the dot-com recession of 2000-02 came through the 2008-09 recession relatively unscathed.

This time it will be different. The build-out of mobile telephony merging with the web has been completed, social media has reached the stagnation phase of the S-Curve and many technologies that are widely promoted as around the corner are far from profitability.

Then there’s slumping global demand for mobile phones and other consumer items that require silicon (processors) and other tech components: autos, to name just one major end-user of electronics.

The net result will be mass layoffs globally across much of the tech sector.Research is nice but it doesn’t pay the bills today or quiet the restive shareholders as profits tank.

The public sector is also ripe for uneven distribution of recessionary impacts.Local government and its agencies in boomtowns such as the SF Bay Area, Seattle, Los Angeles, NYC, etc. have feasted on soaring tax revenues and multi-billion dollar municipal bonds.

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

Record Global Debt & Chaos in 2019 – John Rubino

January 9, 2019

Record Global Debt & Chaos in 2019 – John Rubino

Financial writer John Rubino says no matter what country, the global debt has exploded to record highs, and it’s going to go even higher in the coming years. Rubino contends, “Government debt is going to soar going forward no matter what. Whether we have three more years of growth or a recession next year, we are going to see massive new deficits and massive increases in government debt all over the world. This is coming at a time when we have already hit record levels of debt and blown right through previous record levels. The last crisis, that almost ended the global financial system, was debt driven. The next one is going to be that much, much more serious because we basically doubled the amount of debt that’s out there since 2005 and 2006.”

On the political front, Rubino says, “The idea that things get more extreme from here is not that out of the ordinary and not that hard to believe. We are not just going to see gridlock here in the U.S., we are going to see chaos. That means of the things that should be gotten done, very few of them will be. . . . Political chaos is good for precious metals . . . both metals are way undervalued.”

Few would disagree, that at some point, the financial system is going to explode. Rubino says, “Let’s look at what happens when this finally blows up. The pressure is going to be on currencies when the financial system starts to spin out of control next time. In other words, people are going to see the amount of debt we are taking on, see the amount of currency we are creating to service all this debt, and will wonder what that does to the value of the currencies that are being aggressively created. They will lose faith in those currencies.

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

Could Stocks Rally Even as Parts of the Economy Are Recessionary?

January 7, 2019

Could Stocks Rally Even as Parts of the Economy Are Recessionary?

It’s not yet clear that the stock market swoon is predictive or merely a panic attack triggered by a loss of meds.

We contrarians can’t help it: when the herd is bullish, we start looking for a reversal. When the herd turns bearish, we also start looking for a reversal.

So now that the herd is skittishly bearish, anticipating a recession, contrarians start wondering if a most hated rally is in the offing, one that would leave most punters off the bus.

The primary theme for 2019 in my view is everything accepted by the mainstream is not as it seems. Everything presented as monolithic and straightforward is fragmented, asymmetric and complex.

Take “recession.” The standard definition of recession is two consecutive quarters of negative GDP. But is this metric useful in such a fragmented, complex economy? What we’re seeing develop is certain sectors are already in recession, others are sliding while others are doing OK.

So the question of stocks rising or falling partly depends on which parts of the economy are most heavily weighted in the stock market. If the sectors most heavily represented by listed stocks are doing OK, then other chunks of the economy can be in freefall and stocks could still rise.

There’s also the psychological state of market participants. Was the 20% decline in the 4th quarter a much-delayed reaction to impending recession or was it a panic attack caused by the Federal Reserve withdrawing some of its largesse, i.e. lowering the Fed Put?

It it turns out to be more panic-attack than rational response, a relief rally might be expected.

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

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