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Prepare for Trench Warfare

Prepare for Trench Warfare

Prepare for Trench Warfare

What if China isn’t half so desperate for a deal as the president believes?

Are we in for an extended siege of economic trench warfare?

Today we explore possibilities… and their implications.

We first direct our gaze to Wall Street.

Investors came crouching from their shelters this morning… as if expecting an aftershock to the quake that drove them underground yesterday.

With Monday’s 617-point battering — piling atop last week’s losses — three months of stock market gains have vanished into the ether.

The S&P 500 endured its 15th-largest decline in history yesterday. It has shed $1.1 trillion since May 5 alone.

Markets Bounce Back

But the Earth held today. And investors cleared away some of yesterday’s wreckage.

The Dow Jones rebounded 207 points.

The S&P reclaimed 23 of the 70 points it lost yesterday. The Nasdaq gained 87.

Markets were encouraged by President Trump’s comments that he will strike a deal with China “when the time is right.”

He will have an opportunity at the G20 summit in late June. There he will meet China’s Xi Jinping, for whom his “respect and friendship is unlimited.”

But is China sweating dreadfully for a trade deal as Trump assumes?

China Braces for Escalation

China does — after all — ship some $500 billion of products to these shores each year.

It cannot afford to sit on them like a broody hen.

But you might have another guess, says the director of monetary policy at the People’s Bank of China:

As for the change in the domestic and external economic environment, China has sufficient leeway and a deep monetary policy toolkit, and so has full ability to deal with [economic] uncertainties.

But here we cite a government mouthpiece, a marionette in human form. You no more trust his word than you would trust a dog with your dinner.

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

Central Banks Don’t Matter

Central Banks Don’t Matter

Central Banks Don’t Matter

“There is no money in monetary policy.”

Could it be true? Is there no money in monetary policy?

Yesterday we argued the Federal Reserve cannot even define money… much less measure it to any reasonable satisfaction.

Today we venture upon a heresy deeper still — that central bank “monetary” policy has no actual existence.

No money stands beneath it, behind it, beside it.

The emperor is well and truly nude.

Who then actually controls monetary policy today?

The answer may very well lie hidden in the “shadows.”

The details — the shocking details — to follow.

Monetary Policy Is Actually About Credit and Debt

First moneyman par excellence Jeff Snider — author of today’s opening quotation — rams a sharp stake through the heart of the monetary myth:

Monetary policy has been quite intentionally stripped of money. Banks evolved and there was really no easy way to define money beyond a certain point (in the ’60s), so economists just gave up trying… 

Money as it relates to “monetary” policy is not really money at all. What monetary policy refers to in contemporary terms is something wholly different… When the Federal Reserve… act[s] on monetary measures, they seek not to increase the supply of money to the economy but rather the supply of credit… Monetary policy in the modern sense of the word actually has little to do with money. Instead, it is always and everywhere about credit and debt…

All money is debt-based money in today’s lunatic and preposterous world.

The dollar in your wallet you consider an asset. But only someone else’s previous debt fanned it into existence.

Technically it is a Federal Reserve note. A note is a debt instrument.

None of the foregoing will stagger or flabbergast Daily Reckoning readers.

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

The Fed’s Dangerous Inflation Game

The Fed’s Dangerous Inflation Game

The Fed’s Dangerous Inflation Game

By now you’ve heard that the U.S. economy expanded at an annualized rate of 3.2% in the first quarter of 2019. That was reported by the Commerce Department last Friday morning.

That strong growth coming on top of 4.2% in Q2 2018 and 3.4% in Q3 2018 means that in the past twelve months, the U.S. economy has expanded at about a 3.25% annualized rate. That’s a full point higher than the average growth rate since June 2009 when the expansion began and it’s in line with the 3.22% growth rate of the average expansion since 1980.

It looks as if the “new normal” is back to the old normal of 3% or higher trend growth. Or is it?

The headline growth rate of 3.2% was certainly good news. But, the underlying data was much less encouraging. Most of the growth came from inventory accumulation and government spending (mostly on highway projects). But, business won’t keep building inventories if final demand isn’t there. That’s where the 0.8% growth in personal consumption is troubling.

The consumer didn’t show up for the party in the first quarter.

If they don’t show up soon, that inventory number will fall off a cliff. Likewise, the government spending number looks like a one-time boost; you can’t build the same highway twice. Early signs are that the second quarter is off to a weak start.

Dig deeper and you can see that core PCE (the Fed’s preferred inflation metric) cratered from 1.8% to 1.3%. That’s strong disinflation and dangerously close to outright deflation, which is the Fed’s worst nightmare.

The data just show that the Fed is as far away as ever from its 2% target. But why should it even have 2% as its target?

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

GDP: Fake News

GDP: Fake News

GDP: Fake News

The first-quarter GDP number was released this morning. And at 3.2%, it came in far above estimates. Consensus was about 2.3%. It was also the highest Q1 GDP print since 2015.

But there’s probably less here than meets the eye.

About half the GDP gain came from a surge in inventories and a sharp reduction in the trade deficit, neither of which is sustainable. They are likely one-time boosts.

The economy has been growing since June 2009, making this the second-longest economic expansion on record. However, it has also been the weakest economic expansion on record. That has not changed under President Trump.

Even during Obama’s weak expansion we saw strong quarters including the first quarter of 2015, which was 3.2%, and the second quarter of 2015, which was almost 3%. The problem is that these strong quarters soon faded; growth in the fourth quarter of 2015 was only 0.5%, almost recession level.

Under Trump, second-quarter 2018 growth was a very impressive 4.2% annualized. Third-quarter 2018 growth was 3.4%. Trump’s tax cuts seemed to be producing exactly the kind of 3–4% sustained trend growth Trump had promised.

But then the economy put on the brakes and growth slowed to only 2.2% in the fourth quarter. It looked like the 2018 “Trump bump” in growth was over and growth was returning to the 2.2% trend that had prevailed during the Obama administration.

And despite the first quarter’s 3.2% outlier, I expect lower GDP in the quarters ahead, returning to the same punk levels we’ve seen for nine years.

For the year, economists believe GDP will expand 2.4%, down from last year’s 2.9% gain, as the boost from the 2017 tax cuts and increased government spending over the past two years start to fade.

What about the possibility of recession?

Most investors are familiar with the conventional definition of an economic recession. It’s defined as two consecutive quarters of declining GDP combined with rising unemployment and a few other technical factors.

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

Dollar Dominance Under Multiple, Converging Threats

Dollar Dominance Under Multiple, Converging Threats

Dollar Dominance Under Multiple, Converging Threats

For years, currency analysts have looked for signs of an international monetary “reset” that would diminish the dollar’s role as the leading reserve currency and replace it with a substitute agreed upon at some Bretton Woods-style monetary conference.

That push has been accelerated by Washington’s use of the dollar as a weapon of financial warfare, including the application of sanctions. The U.S. uses the dollar strategically to reward friends and punish enemies.

The use of the dollar as a weapon is not limited to trade wars and currency wars, although the dollar is used tactically in those disputes. The dollar is much more powerful than that.

The dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the U.S. The U.S. can depose the governments of its adversaries, or at least blunt their policies without firing a shot.

But for every action, there is an equal and opposite reaction.

As the U.S. wields the dollar weapon more frequently, the rest of the world works harder to shun the dollar completely.

I’ve been warning for years about efforts of nations like Russia and China to escape what they call “dollar hegemony” and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.

These efforts are only increasing.

Russia has sold off almost all of its dollar-denominated U.S. Treasury securities and has reduced its dollar asset position to almost zero. It has been amassing massive quantities of gold, and has increased the gold portion of its official reserves to over 20%. Russia has almost 2,000 tonnes of gold, having more than tripled its gold reserves in the past 10 years. It has actually acquired enough gold to surpass China on the list of major holders of gold as official reserves.

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

The Real Problem With Modern Monetary Theory

The Real Problem With Modern Monetary Theory

The Real Problem With Modern Monetary Theory

MMT supporters will point to 2008 and say, “Just look at QE. In 2008, the Federal Reserve Balance sheet was $800 billion. But as a result of QE1, QE2, and QE3, that number went to $4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run.We did not have an economic crash. And again, inflation was muted.”

Fed chairman Jay Powell has criticized MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard. That’s because they are the ones who actually proved that MMT works. They point to the fact that the Fed printed close to $4 trillion and nothing bad happened. So it should go ahead and print another $4 trillion.

This is one of the great ironies of the debate. The Fed criticizes MMT, but it was its very own money creation after 2008 that MMT advocates point to as proof that it works.

Their only quibble is that the benefit of all that money creation went to rich investors, the major banks and corporations. The rich simply got richer. MMT advocates say it will simply redirect the money towards the poor, students, everyday Americans, people who need healthcare and childcare. It would basically be QE for the people, instead of the rich.

And it will go into the real economy, where it will boost productivity and finally give us significant growth.

When I first encountered these arguments, I knew they weren’t right. Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected. I had a tough time uncovering the logical flaws.

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

Exposing the Myth of MMT

Exposing the Myth of MMT

Exposing the Myth of MMT

Yesterday I discussed modern monetary theory (MMT) and how it’s become very popular in Democratic circles.

That’s because it allows for much greater government spending without having to raise everyone’s taxes. And everyday citizens could get behind it because it promises to fund lots of programs without seeing their taxes raised.

What’s not to like?

If MMT were just a fringe idea with a few fringe followers, I wouldn’t waste my time or your time on it. But it’s coming your way, so it is important to understand it.

If you missed yesterday’s reckoning, go here for a refresher.

The people who are thinking about MMT, who understand it at least in some superficial way, are the people who are driving the policy debate or running for president.

Many mainstream economists and money managers have attacked MMT, including Fed Chairman Jay Powell, Larry Summers, Paul Krugman, Kenneth Rogoff, Larry Fink, Jeff Gundlach, Jamie Dimon and Ray Dalio.

But much of their criticism is unjustified (see below for more). I’m an opponent of MMT — but for different reasons. As far as I know, I’m the only analyst who’s raised the objections I list below.

Today, I’m going to show you what I believe to be the real problem with MMT.

Again, it’s easy to see why so many politicians on the Democratic side would be such big supporters of MMT.

Some or all of them have come out in support of the following programs:

Free college tuition, student loan forgiveness, Medicare for all, free child care, universal basic income (UBI) and a Green New Deal. Some support them all.

Needless to say, that’s going to cost a lot of money. Just consider the Green New Deal alone.

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

Get Used to the “Powell Put”

Get Used to the “Powell Put”

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

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

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

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

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

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

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

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

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

Three Concerns Hanging Over the Davos Elite

Three Concerns Hanging Over the Davos Elite

This week, the global elite descended private jets to their version of winter ski-camp – the lifestyles of the rich and powerful version.  The World Economic Forum’s (WEF) five-day annual networking extravaganza kicked off in the upscale ski resort town of Davos, Switzerland.

Every year, the powers-that-be join the WEF, select a theme, uniting some 3000 participants ranging from public office holders to private company executives to the few organizations that truly do help fix the world that they mess up.  This year’s theme is “Globalization 4.0”, or the digital revolution. The idea being, the potential tech take-over of jobs, and what wealthier countries are doing to lesser developed ones in the process.

While the topic might be focused on the future, the present is just as troubling, if not more so, than the future.   Such is the disconnect between real people and corporations.  That’s what the estimated 600,000 Swiss Franc membership to be a part of the WEF constellation gets you as a CEO at the Davos table.

Government leaders like German Chancellor Angela Merkel, Brazil’s president, Jair Bolsonaro and Chinese Vice President, Wang Qishan are in attendance this week. Business leaders like Microsoft co-founder Bill Gates and JPMorgan Chase CEO, Jamie Dimon will also take part in the festivities.

Yet, even though the various leaders will likely promote their achievements, what’s lurking behind the pristine snowcapped Alps, is a dark foreboding of a less secure world. Nearly every major forecast from around the world is projecting an economic slowdown. As one Bloomberg article reports, “companies are the most bearish since 2016 as economic data falls short of expectations and political risks mount amid an international trade war, U.S. government shutdown and Brexit.”

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

Volatility Holds the Key to Markets in 2019

Volatility Holds the Key to Markets in 2019

Over the last two weeks, after making good on the four-rate interest hike of 2018, Fed Chairman, Jerome Powell, became more dovish to start 2019.

His change in tone is worth considering because of his historical stance on reducing the amount of artificial stimulus coming from the Fed. Last week, after the required five-year holding period for Fed transcripts were up, we got a glimpse into Powell’s thoughts from 2013, before he was Chairman.

Powell tried to persuade then-Chairman, Ben Bernanke, to reduce the Fed’s stimulus, even though it would lead to greater near-term market volatility. That was when the third round of the Fed’s asset-buying program (QE3) was in full swing. The Fed was purchasing an estimated $85 billion per month mix of Treasuries and mortgage-backed securities.

To indicate that the Fed wouldn’t buy bonds forever, Bernanke floated the idea of slowing down its program, or “tapering,” at some non-defined future date.

Powell, on the other hand, believed the market needed a specific “road map” of the Fed’s intentions. He said that he wasn’t “concerned about a little bit of volatility” though he was “concerned that there may be more than that here.”

Indeed, once Bernanke publicly announced the possibility of the Fed’s bond-buying program slowing down, the market tanked, in a response that became known as a “taper tantrum.” As a result, Bernanke backed off the tapering idea.

Fear of more taper tantrums kept the Fed in check after that. The Fed ultimately waited until it had raised rates sufficiently, before starting to cut the size of its balance sheet. But now Powell is the Chairman. And it seems that he is much less comfortable with volatility than he was under Bernanke, as his most recent remarks indicate.

But it certainly wouldn’t be the first time a Fed chairman has modified his views when he was in control. Alan Greenspan, for example, was a staunch advocate of the gold standard when he was younger (and as presented in Foreign Affairs). But once he was Fed head, suddenly he thought a gold standard wasn’t such a hot idea after all. Go figure.

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

Where Will The “Pending” Financial Crisis Originate?

Where Will The “Pending” Financial Crisis Originate?

– Case for a pending financial collapse is well grounded warns Rickards
– “Ticking time bomb” the Federal Reserve has created is set to go off…
– Economist warns U.S. high-yield debt, default of “junk bonds” could cause next crisis
– Systemic risk is “more dangerous than ever” as “entire system is larger than before”

– Protect wealth by allocating at least 10% of assets in physical gold and silver


Source: BofA Merrill Lynch via Marketwatch.com

from The Daily Reckoning:

The case for a pending financial collapse is well grounded. Financial crises occur on a regular basis including 1987, 1994, 1998, 2000, 2007-08.

That averages out to about once every five years for the past thirty years. There has not been a financial crisis for ten years so the world is overdue. It’s also the case that each crisis is bigger than the one before and requires more intervention by the central banks.

The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.

This means a market panic far larger than the Panic of 2008.

Today, systemic risk is more dangerous than ever because the entire system is larger than before.

Due to central bank intervention, total global debt has increased by about $150 trillion over the past 15 years. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books.

Each credit and liquidity crisis starts out differently and ends up the same. Each crisis begins with distress in a particular overborrowed sector and then spreads from sector to sector until the whole world is screaming, “I want my money back!”

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

2019 Headwinds Are Getting Stronger

2019 Headwinds Are Getting Stronger

In 2017, every prominent economic forecasting entity was shouting from the rooftops about “synchronized global growth.” This was a reference to the fact that not only were certain economies growing, but they were all growing at the same time.

Chinese GDP growth had come down but was still substantial at 6.85%. U.S. GDP growth was posting solid gains of 3.0% in the second quarter of 2017 and 2.8% in the third quarter. Japan and Europe were not growing as quickly as the U.S. and China, but growth was still accelerating from a low level.

Synchronization was a big part of the story. Growth was not isolated and episodic. Growth was fueling more growth in what seemed to be a sustainable way. The world economy was firing on all cylinders.

Then in 2018 the global growth story came screeching to a halt. Japanese growth went negative in the third quarter of 2018. Germany also went negative. Chinese growth continued its drop (6.5% in the third quarter) instead of stabilizing.

The U.K slowed partly because of confusion around Brexit. French growth slid amid riots triggered by a proposed carbon emissions tax. Australian home prices declined precipitously because export orders from China dried up and Chinese flight capital slowed to a trickle due to Chinese capital controls.

The U.S. economy held up fairly well in 2018, with 4.2% growth in the second quarter and 3.5% growth in the third quarter. But much of that growth was inventory accumulation from foreign suppliers in advance of proposed tariffs.

That inventory growth will likely dry up once the tariffs are either imposed or abandoned early this year. Fourth-quarter growth in the U.S. is currently projected at 3.0%, continuing the downtrend from the second quarter.

What happened?

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

America Has a “Neo-feudal” System

America Has a “Neo-feudal” System

The conventional definition of a Bear is someone who expects stocks to decline. For those of us who are bearish on fake fixes, that definition doesn’t apply: we aren’t making guesses about future market gyrations (rip-your-face-off rallies, dizziness-inducing drops, boring melt-ups, etc.).

No, we’re focused on the impossibility of reforming or fixing a broken economic system.

Many observers confuse creative destruction with profoundly structural problems. The technocrat perspective views the creative disruption of existing business models by the digital-driven 4th Industrial Revolution as the core cause of rising income inequality, under-employment, the decline of low-skilled jobs, etc. — many of the problems that plague the current economy.

I get it: those disruptive consequences are real. But they aren’t structural: crony capitalism and the state-cartel system is structural, because cartels can buy political protection from competition and disruptive technologies. Just look at all the cartels that have eliminated competition: higher education, defense contractors, Big Pharma — the list is long.

The fake fixes to the structural dominance of cartels and entrenched elites come in two flavors: political reforms that add complexity (oversight, compliance, etc.) but never threaten the insiders’ skims and scams. And monetary policies such as low interest rates and unlimited liquidity that enrich the already-wealthy by funneling whatever gains are being reaped to them rather than to labor.

I explain how this neo-feudal economy is the inevitable result of our system in my new book Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic.

Our political system, dependent on campaign contributions and lobbying, is easily influenced to protect and enhance the private gains of corporations and financiers. Combine this with the gains reaped by those with access to cheap credit and you have a financial nobility ruling a class of debt-serfs.

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

The Fed Is Panicking

The Fed Is Panicking

This week I’ve been in Washington, D.C. for high level meetings focused on the economy. While meeting with senior officials and members of the House and Senate, it became clear that a troubling phenomenon is building.

Nomi at the Eccles Building in D.C.

Your correspondent at the Eccles Federal Reserve
Board Building in Washington D.C.

In the wake of recent stock market volatility and uncertainty surrounding monetary policy, it seems that political figures are starting to grow concerned.

There is growing consensus that the makings of a financial crisis of some sort is building — and could drop sooner rather than later. While there is speculation over whether it will be as big as the last one, and whether it will come in waves, the belief is that something is wrong.

With those fears, I turned the Federal Reserve itself. While meeting at the Fed, I was given the impression that bank regulators have been routinely chastised by Wall Street bankers. What I learned is that some of the biggest playmakers in finance don’t want to disclose the true nature of their positions and money-making schemes. This confirmed my own experiences as an former investment banker.

In addition, it became clearer that Fed Chairman, Jay Powell, and Vice Chairman, Randal Quarles, will be closely studying real economic and bank data when rendering decisions about the path of interest rates. Many have speculated about such dealings, and whether they will be swayed by President Trump’s pressure.

The truth is that the leaders at the Fed have a firmer understanding of what’s really going on in the economy than they allude to publicly. Even though the Fed has been able to avoid another financial crisis the last decade, with quantitative easing (QE) policy — or what I call dark money — their “toolkit” might not render us “safe enough.” They need to grapple with this reality.

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

The Makings of a Global Debt Crisis Are in Place

The Makings of a Global Debt Crisis Are in Place 

In 2017, the financial world was filled with talk of synchronized sustainable growth in major economies for the first time since before the 2008 global financial crisis. This was being proclaimed by global financial elites including Christine Lagarde, head of the IMF.

Now that vision is in ashes. Synchronized global growth has turned into a synchronized global slowdown. Growth has already turned negative in two of the world’s largest economies, Japan and Germany, and is slowing rapidly in the world’s biggest economies, China and the U.S.

China may report something like 6.8% GDP growth, but when all the waste in its economy is stripped out the actual growth is probably closer to 4.5%. That’s still growth, but not nearly enough to sustain China’s massive debt overload. Its debt is growing faster than the economy and its debt-to-GDP ratio is even worse than the U.S.

For a sense of perspective, China had about $2 trillion total debt in 2000. Today, it’s about $40 trillion. That’s an unbelievable 2,000% increase in under 20 years.

Growth is also slowing in the U.S. The 2009–2018 recovery has already been the weakest recovery in U.S. history despite a few good quarters here and there. And there’s little reason to expect it to pick up from here.

GDP expanded 3.5% last quarter, which looks good on paper. But the trend is pointing down. Since this April, we’ve seen growth of 4.2% (Q2), and 3.5% (Q3). This trend tends to confirm the view that 2018 growth was a “Trump bump” from the tax cuts that will not be repeated. And Q4 GDP will probably be lower than Q3.

Goldman Sachs, for example, projects fourth-quarter GDP to expand at 2.5%. It further expects growth to drop to 2.2% by the second quarter of 2019, and to 1.6% by the end of the year.

…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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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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