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Blain’s Morning Porridge – June 11 2020: The illusion wears thin

Blain’s Morning Porridge – June 11 2020: The illusion wears thin

“It is the system that deserves to be blamed. What those who wish to perpetuate the system deserve is another question.”

The Fed did exactly what was expected – nay, demanded! Asset purchase volumes will be maintained while rates will remain near zero for the next 2 years. Hallelujah! The market shrugged aside indications a second virus wave is hitting across parts of the US and Europe… 

If Fed-Head Jay Powell has said anything else, there would have been a hissy-fit mini-taper-tantrum. The dominant force on markets will remain central banks juicing markets – and all the entails in terms of distortion. The immediate lesson for investors is – keep buying! The Fed and the other CBs have got your back. They can’t afford for markets to stumble.

Problem is… little the Fed said is likely to change the reality of the coming recession. The downturn might not be as deep or as bad as we originally feared, but whatever nonsense some analysts are spouting in terms of hopes for a V-Shape recovery… recession is coming. It might be less damaging, and less long-lived than we fear… But.. 

There is a new and growing dimension to this crisis…

The Black Lives Matter demonstrations around the globe highlight the threat of social unrest, and political dislocation. When the virus kicked in, I commented a few times how lockdown frustrations and hot summer nights could be a recipe for riots. But, what’s happened is much more fundamental – and should be a critical concern for investors in terms of how it changes the political narrative.  

Unrest is a political issue – and politics have a seriously underestimated ability to roil markets. 

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

Underneath the Surface Trouble Is Brewing Once Again

Underneath the Surface Trouble Is Brewing Once Again

Larry McDonald, publisher of the investment research service The Bear Traps Report, warns that this crisis is far from over. He spots growing tensions in the credit markets and thinks that large public borrowers like Italy and New York State are in need of massive bailouts.


Stocks have staged an impressive comeback. Since the lows of March, the S&P 500 has gained almost 30%. Despite that, Larry McDonald would not be surprised if new turmoil soon arose.

“In March 2008 for instance, after the failure of Bear Stearns, the Fed acted aggressively and we had a big relief rally. But then came Lehman,” says the renowned investment strategist.

Mr. McDonald knows what he’s talking about. As a former vice-president of distressed debt trading at Lehman Brothers he witnessed the meltdown of the global financial system first hand. Today, he runs the The Bear Traps Report, an independent investment research service for institutional investors.

In this in-depth interview with The Market/NZZ, Mr. McDonald warns of rising defaults in the credit markets and points out that large public borrowers such as Italy and New York State are going to need bailouts of historic proportions. However, he spots opportunities in the metals and mining sector.

Mr. McDonald, despite a grim economic picture, investors are getting confident that the worst of the pandemic is behind us. What’s your take on the financial markets?

Equity markets have priced in a lot of love from the Federal Reserve. The Fed has done a lot to ease financial conditions, and the amount of liquidity is amazing. Since late February, they’ve done more in terms of balance sheet expansion than nearly two years of action in 2008 to 2010. They’ve clearly pumped up asset prices.

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

Why Assets Will Crash

Why Assets Will Crash

This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees.

The increasing concentration of the ownership of wealth/assets in the top 10% has an under-appreciated consequence: when only the top 10% can afford to buy assets, that unleashes an almost karmic payback for the narrowing of ownership, a.k.a. soaring wealth and income inequality: assets crash.

Most of you are aware that the bottom 90% own very little other than their labor (tradeable only in full employment) and modest amounts of home equity that are highly vulnerable to a collapse of the housing bubble. (The same can be said of China’s middle class, only more so, as 75% of China’s household wealth is in real estate, more than double the percentage of wealth held in housing in U.S. households.)

As the chart illustrates, the top 10% own 84% of all stocks, over 90% of all business equity and over 80% of all non-home real estate. The concentration of ownership of assets such as vintage autos, collectibles, art, pleasure craft and second homes in the top 10% is likely even greater.

The more expensive the asset, the greater the concentration of ownership, as the top 5% own roughly 2/3 of all wealth, the top 1% own 40% and the top 0.1% own 20%. In other words, the more costly the asset, the narrower the ownership. (Total number of US households is about 128 million, so the top 5% is around 6 million households and the top 1% is 1.2 million households.)

This means the pool of potential buyers is relatively small, even if we include global wealth owners.

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

Overcapacity / Oversupply Everywhere: Massive Deflation Ahead

Overcapacity / Oversupply Everywhere: Massive Deflation Ahead

The price of a great many assets will crash, out of proportion to the decline in demand. 

Oil is the poster child of the forces driving massive deflation: overcapacity / oversupply and a collapse in demand. Overcapacity / oversupply and a collapse in demand are not limited to the crude oil market; rather, they are the dominant realities in the global economy.

Yes, there are shortages in a few high-demand areas such as PPE (personal protective equipment), but across the entire spectrum of global supply and demand, there is nothing but a vast sea of overcapacity / oversupply and a systemic decline in demand as far as the eye can see.

Here’s a partial list of commodities that are in Overcapacity / oversupply:

1. Overvalued assets

2. Overpriced income streams (as income craters, so will the asset generating the income)

3. Labor: low-skill everywhere, high-skill in sectors experiencing systemic collapse in demand

4. AirBnB and other vacation rental properties

5. Overpriced flats, condos and houses

6. Overpriced rental apartments

7. Overpriced commercial office space

8. Overpriced retail space

9. Overpriced used vehicles

10. Overpriced collectibles

I think you get the idea.

Should China restart its export factories, then almost everything being manufactured will immediately be in oversupply, as the global export sector was plagued with mass overcapacity long before the Covid-19 pandemic crushed demand.

Incomes will crater as revenues and profits crash, small businesses close their doors, never to re-open, local governments tighten spending, and whatever competition still exists will relentlessly push the price of labor, goods and services lower.

Globalization has generated hyper-specialization in local and regional economies, stripping them of resilience. Fully exposed to the demand flows of a globalized class of consumers with surplus discretionary income, regions specialized in tourism, manufacturing, commodity mining, etc.

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

Morgan Stanley: “Climate Will Be A Key Driver Of Asset Prices In The Months And Years Ahead”

Morgan Stanley: “Climate Will Be A Key Driver Of Asset Prices In The Months And Years Ahead”

“Sunday Start”, authored by Morgan Stanley equity strategist, Jessica Alsford

In three weeks, the world’s leaders will begin to gather in Madrid for the 25th United Nations Climate Change Conference. The intensity of the global climate strikes this year suggests that the proceedings will be scrutinized as never before. But the decisions made, or not made, will also have repercussions for global markets.

We’re transitioning towards a lower carbon economy, albeit at a slower pace than needed to stay within a two degrees Celsius climate scenario (2DS). For companies that can build offshore wind installations, develop electric vehicles and manufacture renewable diesels, we see potential for material earnings growth. In Decarbonisation: The Race to Net Zero, we estimated that more than US$50 trillion of capital will need to be deployed into renewables, EVs, hydrogen, biofuels and carbon capture and storage over the next 30 years, putting US$3-10 trillion of EBIT up for grabs.

Decarbonising electricity is the largest opportunity to reduce carbon emissions, with the power sector responsible for a quarter of global emissions. Strong renewables growth should be achievable given the significant improvements we’ve seen in solar and wind economics. But costs continue to constrain many other clean technologies, including battery storage, green hydrogen, CCS and biofuels.

If governments are serious about halting climate change, some form of stimulus will be needed.

Subsidies have already been key in industries like renewables. In the US, federal subsidies have helped to drive the transition to renewable energy, which rose from 14% of total power generation capacity in 2000 to 24% in 2018.

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

Artificial & Fragile Market Very Dangerous – Michael Pento

Artificial & Fragile Market Very Dangerous – Michael Pento

By Greg Hunter’s USAWatchdog.com

Money manager Michael Pento says don’t confuse a near record high stock market with strength and resiliency. What we have is just the opposite, as Pento explains, “There are some people who will listen to this and say, ‘Hey Mr. Pento, why are you such a Cassandra? Why are you so down? Don’t you know that the stock market is doing great? Don’t you know that I have a job?’ But here’s the thing, the entire edifice, the entire construct is artificial. It is controlled by governments and central banks. Hence, it is much more fragile, infinitely more fragile than if it was dictated by the free market. . . . This has to end badly because the distortions have to be reconciled. It was once okay to have recessions and corrections in the stock market when the stock market was not the economy, but asset prices have become the economy. Therefore, they lead the economy and they don’t follow the economy. Yes, this is going to end badly I am sorry to say.”

What will knock this market back to reality? Pento says, “You will eventually get a recession or eventually you will get inflation. You might just get both. You might just get a huge case of stagflation to hit this country and around the world. That’s what I am most afraid of.”

In closing, Pento warns, “Japan has no growth. There is no growth in Germany. There is no growth in Italy. We have an earnings recession here in the United States. So, what you have engendered here is most likely a protracted period of stagflation, which is going to lead to an epic and massive crash in asset prices. That’s what you have at your feet, so be careful.”

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

Mark Carney Says Climate Change Will Bring Economic Disaster. Will the Powerful Listen?

Mark Carney Says Climate Change Will Bring Economic Disaster. Will the Powerful Listen?

Global bank heads say urgent action needed to prevent a ‘Minsky moment’ collapse in asset prices.

extinction-rebellion.jpg
Politicians and corporate heads might not listen to warnings from Extinction Rebellion protesters. Will they heed Mark Carney and other central bankers? Photo by Takver, Creative Commons licensed.

They may find themselves feeling just a little shaky, however, after a recent open letter written by Canadian Mark Carney, governor of the Bank of England, with Banque de France governor François Velleroy de Falhau and Frank Elderson, chair of the Network for Greening the Financial Services (NGFS)

These guys are not shaggy Extinction Rebellion protesters being busted in London. And teenage activist Greta Thunberg would likely ask why they took so long to admit what’s been obvious since long before she was born in 2003.

But Carney and his colleagues advise the masters of the universe; they are the consiglieri of the world’s corporate capos, and when they murmur a warning in the capos’ collective ear, wise capos heed them. 

Their open letter announced the first report of the Network for Greening the Financial Services, a group that includes central bankers from around the world. That report tells the capos that “climate-related risks are a source of financial risk.” (Greta Thunberg and billions of other girls would roll their eyes.)

The report continues with equally obvious warnings: climate change will affect the economy on all levels from households to government; it’s highly certain; it’s irreversible; and it depends on short-term actions (right now, this minute) by “governments, central banks and supervisors, financial market participants, firms and households.”

Back to 1960

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

The Source of Killer Inflation: Services

The Source of Killer Inflation: Services

The soaring cost of services is driven by a number of factors.

What will the future bring: fire (inflation) or ice (deflation)? The short answer: both, but in very different doses. Goods that are tradeable and exposed to technologically driven commodification will decline in price (deflation) while untradeableservices that are difficult to commoditize will increase in price (inflation), generating a self-reinforcing feedback loop of wage-price inflation.

Gordon Long and I discuss these trends in our latest program The Supply-Demand Services Problem (YouTube).

The big difference between goods that drop in price (TVs, etc.) and services that are exploding higher (healthcare, childcare, elderly care, higher education, local taxes and fees, etc.) is the relative size each occupies in the household budget: a new TV is a couple hundred bucks and a once-every-few-years purchase, while all the services cost thousands of dollars annually– or even tens of thousands of dollars.

A new TV or electronic gew-gaw is signal noise in the household budget while services consume the most of what’s left after paying for housing and transport.

A 10% decline in the cost of a new TV is $25, while a 10% increase in annual tuition and college fees is $2,500. Add in thousands more for childcare, elderly care, local taxes and fees and healthcare, and the deflationary impact of tradeable goods is trivial compared to the increases in untradeable services.

Not all goods are declining in sticker price. vehicles are rising sharply in price, a fact that’s erased by hedonic adjustments in official inflation (the new car is supposedly so much better than the previous model that the “price” actually declines-heh).

Then there’s the inexorable shrinkage of quantity and quality. The package that once held 16 ounces now contains 13.4 ounces, and the appliance that once lasted for years now lasts a few months as the quality of components is reduced. 

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

Empty Words Are Failing. A Timeline For What Comes Next

Empty Words Are Failing. A Timeline For What Comes Next

A quick recap of the past couple of months: 

Stocks plunge.

The politicians, bureaucrats and bankers who depend on artificially-elevated financial asset prices start to panic.

The Fed announces that maybe it won’t have to raise interest rates any more, and the president announces a temporary cease-fire in the trade war with China.

The markets bounce, leading some to conclude that the worst is over and it’s time to go back to buying the dip.

A larger number of people conclude that the changes in policy were really just empty words. No actual actions had taken place.

Stocks start falling again. You are here — as this is written on Tuesday Dec 4, the Dow is down about 300 points.

What happens next?
Think of the past few months as the first act in a play that is performed in virtually every business cycle, with later acts following a predictable script. Here’s how it’s likely to go this time:

Words give way to modest action (early 2019). When the markets figure out that empty promises don’t change the underlying reality of slowing growth, falling corporate profits and rising loan defaults, they return to panic mode. Governments are then forced to actually do things to try to stop the bleeding. In the current US case, that means the Fed will announce that it’s done raising rates and will soon start cutting. Trump, meanwhile, will cut a trade deal with China that accomplishes little but removes the future uncertainty.

This will be greeted with another few days of market euphoria, followed by the realization that, again, nothing substantive has changed. Stocks will resume their decline. Let’s call this “2008 revisited.”

DJIA 2008 empty words fail

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

How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

How the Economy Works as It Reaches Energy Limits — An Introduction for Actuaries and Others

Why have long-term interest rates generally fallen since 1981? Why have asset prices risen? Can these trends be expected to continue? The standard evaluation approach by actuaries and economists seems to be to look at past patterns and assume that they will be repeated.

The catch is that energy consumption growth plays a hugely important role in GDP growth. It also plays an important role in interest rates that businesses and governments can afford to pay. Energy consumption growth has been slowing; it is hard to see how growth in energy consumption can ramp back up materially in the future.

Slowing growth in energy consumption puts the world on track for a future like the 1930s, or even worse. It is hard to see how GDP growth, interest rates, and inflation rates can ramp up in the future. More likely, asset price bubbles will pop, leading to significant financial distress. Derivatives may be affected by rapid changes in prices and currency relativities, as asset bubbles pop.

The article that follows is a partial write-up of a long talk I gave to a group of life and annuity actuaries. (I am a casualty actuary myself, which is a slightly different specialty.) A PDF of my presentation can be found at this link: Reaching Limits of a Finite World

Slide 1

..

Slide 4

After the audience had a chance to answer this question (mostly with yes), I gave my answer: “Yes, indeed, it is possible to build a model that gives misleading results, and not understand the situation.” For example, a flat map works as a perfectly adequate model in some situations. But when longer distances are involved, a globe is needed. A two-dimensional model works for some purposes, but not for others.

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

The Two Most Important Reasons To Invest In Gold & Silver

The Two Most Important Reasons To Invest In Gold & Silver

As the markets and financial system continue to be propped up by an ever-increasing amount of debt and leverage, precious metals investors need to understand the two most important reasons to invest in gold and silver.  While one of the reasons to own precious metals is understood by many in the alternative media community, the more important critical factor is not.

The motivation to write this article is due to the increasing amount of negative sentiment and comments in regards to precious metals analysis and investing.  There’s a very interesting notion put forth by many commenters that the precious metals analysts and dealers are the frauds and charlatans, not Wall Street or the Central Banks.  I imagine they believe this because gold and silver prices haven’t performed as forecasted or compared to the insanely inflated stock, real estate, and crypto markets.

Before I discuss the two important reasons to own precious metals, I would like to provide some information about the fraud and corruption taking place in the financial industry.

Now, it is true that a few precious metals dealers have defrauded investors, but this is true with all sectors and markets in the financial industry.  However, investors frustrated with the precious metals tend to forget the massive amount of fraud and losses that took place as a result of the 2008 Housing and Investment Banking collapse.

For example, according to the article, Financial Crisis Bank Fines Hit Record 10 Years After The Market Collapse:

$150 billion (127.6 billion euros) – that’s how much US authorities have collected in fines from financial institutions for shady dealings with subprime mortgages since the beginning of the credit crisis in 2007, according to research by the British business daily Financial Times (FT).

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

Yra Harris: “There Are Increasing Concerns Around The Globe That Central Bankers Do Not Have An Exit Strategy”

Back in November, we brought to the attention of our readers a stunning admission from one of Citi’s head credit strategists, Hans Lorezen, who said matter-of -factly that during his conversations with central bankers, there was a growing fear that they’ve lost control:

In the context of a self-reinforcing, herding market, the pivot point where the marginal investor is indifferent between putting more money back into risk assets and holding cash instead is fluid. But when the herd suddenly changes direction, the result is a sharp non-linear shift in asset prices. That is a problem not only for us  trying to call the market, but also for central bankers trying to remove policy accommodation at the right pace without setting off a chain reaction – especially because the longer current market dynamics run, the more energy will eventually be released.

That seems to be a growing fear among a number of central bankers that we have spoken to recently. In our experience, they too are somewhat baffled by the lack of volatility and concerned about the lack of response to negative headlines…. Our guess is that sooner or later in the process of retrenchment they will end up going too far – though that will only be obvious with hindsight.

Fast forward to today when as Yra Harris writes in his latest Notes from the Underground, the realization that central bankers are on the verge of panic is that much closer, because as the veteran trader and strategist notes, “the continued efforts by the ECB, BOJ and Swiss National Bank to keep their overnight rates at crisis-era levels is increasing concerns around the globe that central bankers in general do not have an exit strategy.”

…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 environmental consequences of monetary dysfunction

The environmental consequences of monetary dysfunction

Dysfunction of the money-system underpins the problems of the world’s multiple converging crises. Discuss.

Might that assertion be taking an ideological position, encouraged by the echo chambers of like-minded twitterati? This piece is an attempt to tease out the nature of the underlying connection, and in doing so describe some of the attack surfaces that are available to those bent on change.

From an environmental perspective the most damaging money-system dysfunction is the misallocation of credit. Commercial banks have been given the responsibility of deciding who should receive loans – for capital investment, mortgages and asset purchases for example – and the privilege of charging interest on those loans. They are largely unconstrained in this process – while there are theoretical constraints, in practice their main concern is making sure they get their full whack of interest due over the term of the loan. They therefore generally prefer lending secured against an asset that they can repossess if necessary than against the uncertain (and difficult to assess – at least for today’s disconnected and centralised account managers) future productive capability of entrepreneurial projects. This is borne out by figures for productive investment which tend to show lending for productive use at about 15%.

The first consequence of this preference is that the banks find themselves in an unholy alliance with asset owners, with a joint interest in ever rising asset prices and a reluctance to moderate activity in asset markets lest their loans lose collateral value. They all know in their hearts that this will eventually mean painful busts. But they also know that when the time comes they will be bailed out by the government, that many of their more savvy and comfortably-connected friends will have disposed of their assets ahead of the peak, and that the greater part of the associated pain will be experienced by less well connected ‘outsiders’. There is no real sanction on the banks or their senior management from buying into this toxic cycle. So we should not be surprised when it repeats. They operate in any case with a sort of herd mentality, and taking a heterodox stance would fail the wine-bar peer-reviews. There is no way that this cycle can avoid the progressive concentration of wealth. (In passing we might note that this in turn puts a misplaced emphasis on philanthropy and volunteerism as means to address society’s ills.)

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

In this Era of Inflated Asset Prices, Can the Fed Raise Rates without Causing Financial Mayhem?

In this Era of Inflated Asset Prices, Can the Fed Raise Rates without Causing Financial Mayhem?

Wolf Richter on the Keiser Report.

The Fed is trying to accomplish a soft landing — hence the extraordinarily slow rate hikes — but our history with soft landings is very spotty, and there has never been more debt than now:

Investors in the corporate bond market, particularly in junk bonds, are still blowing off the Fed. But not much longer. Read…  Corporate Bond Market Gets Ready for Big Reset

Olduvai IV: Courage
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Olduvai II: Exodus
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