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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

A Warning Knell From the Housing Market–Inciting a Riot

  • Global residential real estate prices continue to rise but momentum is slowing
  • Prices in Russia continue to fall but Australian house prices look set to follow
  • After a decade of QE, real estate will be more sensitive to interest rate increases

As anyone who owns a house will tell you, all property markets are, ‘local.’ Location is key. Nonetheless, when looking for indicators of a change in sentiment with regard to asset prices in general, residential real estate lends support to equity bull markets. Whilst it usually follows the performance of the stock market, this time it may be a harbinger of austerity to come.

The most expensive real estate is to be found in areas of limited supply; as Mark Twain once quipped, when asked what asset one should invest in, he replied, ‘Buy land, they’re not making it anymore.’ Mega cities are a good example of this phenomenon. They are a sign of progress. As Ian Stewart of Deloittes put it in this week’s Monday Briefing – How distance survived the communication revolution:-

In 2014, for the first time, more of the world’s population, some 54%, lived in urban than rural areas. The UN forecasts this will rise to 66% by 2050. Businesses remain wedded to city locations. More of the UK’s top companies are headquartered in London than a generation ago. The lead that so-called mega cities, those with populations in excess of 10 million, such as Tokyo and Delhi, have over the rest of the country has increased.

Proximity matters, and for good reasons. Cities offer business a valuable shared pool of resources, particularly labour and infrastructure. Bringing large numbers of people and businesses together increase the chances of matching the right person with the right job. 

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

Bob Shiller Warns World’s “Priciest Stock Market” Could “Absolutely Turn Suddenly”

Nobel Prize-winning economist Robert Shiller told CNBC Tuesday that a market correction could come at any time and without warning

“People ask ‘well what will trigger [a market correction]?’ But it doesn’t need a trigger, it’s the dynamics of bubbles inherently makes them come to a sudden end eventually…”

Shiller, who won the Nobel Prize for Economics in 2013 for his work on asset prices and inefficient markets, said that markets could “absolutely suddenly turn” and that he believed the bull market was hard to attribute totally to the U.S. political scene.

“The strong bull market in the U.S. is often attributed to the situation in the U.S. but it’s not unique to the U.S. anyway, so it’s hard to know what the world story is that’s driving markets up at this time, I think it’s more subtle than we recognize,”

Additionally Shiller writes in Project Syndicate that it is impossible to pin down the full cause of the high price of the US stock market, warning that this fact alone should remind all investors of the importance of diversification, and that the overall US stock market should not be given too much weight in a portfolio.

The level of stock markets differs widely across countries. And right now, the United States is leading the world. What everyone wants to know is why – and whether its stock market’s current level is justified.

We can get a simple intuitive measure of the differences between countries by looking at price-earnings ratios. I have long advocated the cyclically adjusted price-earnings (CAPE) ratio that John Campbell (now at Harvard University) and I developed 30 years ago.

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

You’re Just Not Prepared For What’s Coming

You’re Just Not Prepared For What’s Coming

Not even close

I hate to break it to you, but chances are you’re just not prepared for what’s coming. Not even close.

Don’t take it personally. I’m simply playing the odds.

After spending more than a decade warning people all over the world about the futility of pursuing infinite exponential economic growth on a finite planet, I can tell you this: very few are even aware of the nature of our predicament.

An even smaller subset is either physically or financially ready for the sort of future barreling down on us. Even fewer are mentally prepared for it.

And make no mistake: it’s the mental and emotional preparation that matters the most. If you can’t cope with adversity and uncertainty, you’re going to be toast in the coming years.

Those of us intending to persevere need to start by looking unflinchingly at the data, and then allowing time to let it sink in.  Change is coming – which isn’t a problem in and of itself. But it’s pace is likely to be. Rapid change is difficult for humans to process.

Those frightened by today’s over-inflated asset prices fear how quickly the current bubbles throughout our financial markets will deflate/implode. Who knows when they’ll pop?  What will the eventual trigger(s) be? All we know for sure is that every bubble in history inevitably found its pin.

These bubbles – blown by central bankers serially addicted to creating them (and then riding to the rescue to fix them) – are the largest in all of history. That means they’re going to be the most destructive in history when they finally let go.

Millions of households will lose trillions of dollars in net worth. Jobs will evaporate, causing the tens of millions of families living paycheck to paycheck serious harm.

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

The ‘Hyper-Crash’ Is Coming – It’s Not The Everything Bubble, It’s The Global Short Volatility Bubble

The ‘Hyper-Crash’ Is Coming – It’s Not The Everything Bubble, It’s The Global Short Volatility Bubble

Two weeks ago, we discussed the recent report from Artemis Capital Management, “Volatility and the Alchemy of Risk – Reflexivity in the Shadows of Black Monday 1987”, authored by Christopher Cole. See “In the Shadows Of Black Monday – “Volatility Isn’t Broken…The Market Is”. The full report can be accessed here.

Perhaps because we posted it on a weekend, we feel that this must read report – one of the best reports we’ve read in years – has not received the profile it deserves. We think that it’s important to highlight it again, as it explains the mechanics which are likely to drive the next financial crisis. We begin with a ten bullet point summary.

In the Global Short Volatility Bubble:

  • We are in an unprecedented bear market in fear, i.e. falling volatility, thanks to the unconventional monetary policies of central banks;
  • Instead of being an external measure of risk, volatility has become a tradeable input – making it reflexive in nature;
  • As volatility falls, investors (using leverage) take bigger bets in the same direction, so lower volatility begets lower volatility.
  • The global short volatility trade is more than $2 trillion;
  • It consists of explicit short volatility trades and implicit short volatility trades, e.g. risk parity and accumulated equity share buybacks (price insensitive/buy the dip);
  • Due to reflexivity, in any shock to the system which starts an unwind in the global short volatility trade, higher volatility will reinforce higher volatility;
  • The markets are effectively converging into what’s known in option markets as a ‘naked short straddle’ – as volatility declines, the upfront premium (yield) declines while non-linear risk rises;
  • Non-linear risk has four components – rising volatility, gamma risk, unstable cross-asset correlations and rising interest rates;
  • Volatility is the most undervalued asset class in the world;
  •  The unwind of the global short volatility trade would lead to a sudden hyper-crash, similar but worse than 1987.

…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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