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Blain’s Morning Porridge – October 21st 2019

Blain’s Morning Porridge  – October 21st 2019 

“If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year.”

It’s a big week for markets with the ECB meeting, some critical Q3 stock numbers and a host of things to worry about in terms of economic releases and the continuing slowing of the Chinese economy. Its all critical stuff for the bond market – which I reckon is a ticking time-bomb. But more about that later… For stock markets, the quote this morning sums it up – the mood is changing: forget the disruptive tech unicorns and focus on fundamentals. But, first up we really can’t ignore the Brexit mess in the UK.  Saturday’s SNAFU gives investors another chance to load up on Sterling.  At some point Brexit will be fixed.  It might be messy. 

Brexxxxxxiiiiitttt….. 

I am sure foreign readers are wondering how the Mother of All Parliaments is making such a Horlicks of the Brexit negotiations.  It really doesn’t look good does it?   On the other hand, it does show the vibrancy of our political process, and the fact individuals can force it to change. It’s just a shame so many of these individuals seen to be self-seeking egotistical numpties of the worst kind – but even Oliver Letwin has a mother that probably loves him.  

The reason Brexit is so messy is simple. It boils down to weak government – which is a recent thing here in the UK. 

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

The Ghost Election Issue We Need to Get Real about: Personal Debt

The Ghost Election Issue We Need to Get Real about: Personal Debt

Canadians are so deep in the red it colours how we see vital issues.

CreditCardWebBanking.jpg
‘Owing vast amounts of money seems now a defining Canadian characteristic and is increasingly enabled by indulgent political leaders.’ Photo via Shutterstock.

Today we manufacture armored vehicles for the brutal regime in Saudi Arabia while fretting about domestic job losses if we don’t. 

Conservative Leader Andrew Scheer pledges to slash Canada’s already paltry foreign aid budget by 25 per cent in favour of consumer tax cuts. 

Climate change is the defining issue of this century, yet Canada has the highest per capita carbon emissions in the G20 and is far from a global leader in fighting fossil fuels. 

What happened to the storied Canadian character?

The reason Canada cannot act in a more moral manner might lie in ballooning amounts of household debt. Canadians now owe an eye-watering $2.2 trillion or 178 per cent of disposable income — a measure that has doubled in the last 20 years. Personal bills now amount to more than our entire GDP, making us the most indebted citizenry in the G20 and fourth highest in the world. 

Over half of Canadians report they are only $200 per month away from insolvency. 

How can you care about climate change or global stability when your credit cards are maxed out or you are dodging debt collectors? Owing vast amounts of money seems now a defining Canadian characteristic and is increasingly enabled by indulgent political leaders. Andrew Scheer and Canada’s conservatives are unapologetic in pandering to those who gorged on cheap credit. 

The belated Conservative campaign platform pledges to cut infrastructure investment by $18 billion in favour of reduced taxes. Scheer’s simple message is parsed for those most myopically interested in their pocketbook: “If you pay income tax, you will pay less under my government.”

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

Changes are Coming in 2020

Changes are Coming in 2020 

QUESTION:  I have a question, you wrote :

“Those in Europe who have a position in cash, it may be better to have shares or a private sector bond or US Treasury. Given the policy in Europe of no bailouts, leaving cash sitting in your account could expose you to risk in the months ahead.”

For example, if one has a trading account with a bank, is leaving cash in the bank’s trading account immune to potential seizure indicated in your comment?

Appreciate your clarification,

AP

ANSWER: The risk in Europe is that there is no true rule of law. On the one hand, there is this policy of no bailouts for that would mean money could cross borders. Then there is the rising socialism which is turning into real hatred of the rich.

There is no definitive answer. Europe will do whatever it has to do when the time comes shy of doing the right thing. I have written before when Italy could not meet its debts on short-term paper, they simply decreed that your 90-day paper was now a 10-year paper.

Governments can do whatever they desire. We have no recourse against governments. No private company could act in such a manner. This is one primary reason why I believe governments should be prohibited from borrowing. People are fools for buying their paper and always expecting that this time will be different.

Underestimating Them & Overestimating Us

UNDERESTIMATING THEM & OVERESTIMATING US

“Do not underestimate the ‘power of underestimation’. They can’t stop you, if they don’t see you coming.” ― Izey Victoria Odiase

Image result for bernanke, yellen, powell

During the summer of 2008 I was writing articles a few times per week predicting an economic catastrophe and a banking crisis. When the biggest financial crisis since the Great Depression swept across the world, resulting in double digit unemployment, a 50% stock market crash in a matter of months, millions of home foreclosures, and the virtual insolvency of the criminal Wall Street banks, my predictions were vindicated. I was pretty smug and sure the start of this Fourth Turning would follow the path of the last Crisis, with a Greater Depression, economic disaster and war.

In the summer of 2008, the national debt stood at $9.4 trillion, which amounted to 65% of GDP. Total credit market debt peaked at $54 trillion. Consumer debt peaked at $2.7 trillion. Mortgage debt crested at $14.8 trillion. The Federal Reserve balance sheet had been static at or below $900 billion for years.

During 2007, a risk averse senior citizen couple (my parents) who had accumulated $200,000 of retirement savings over their lifetime of hard work, could generate $10,000 of interest income in a Vanguard money market fund yielding 5%. This supplemented their modest Social Security income of $20,000 to $30,000 per year. The interest rate on savings during normal economic times was generally 2% above inflation, which hovered around 3% in 2007 according to the data manipulators at the BLS.

As the summer of 2008 progressed, I felt more disconnected. I had been doing everything possible to support Ron Paul’s candidacy for president, but the masses weren’t ready for the truth or the reality of our situation. In my opinion the country was already off-course and headed towards a debt created disaster. 

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

Central Banks Trapped by Their Theories

Central Banks Trapped by Their Theories 

QUESTION: Hi Martin,

I can understand how JP and EU backed themselves into a corner with negative rates. Happy to give them the benefit of the doubt when this all started 3-4 years ago even though it was obvious this was not going to end well.
However, what I don’t understand is the thought process that reserve banks today need to perpetuate eternal growth when I would think their role should be to smooth out extremes (debatable this is even possible).

RBA is a case in point as while the Australian economy is slowing, it is nowhere near terrible. There is talk that they will now also look to lower rates to near zero and start QE. I get that all reserve banks are looking to maintain lower exchange rates and so they need to keep pace with the rest of the world but one would think they would learn better from mistakes of EU and JP.

My question is, is this a global conspiracy or just plain stupidity?

Thanks for all ….

David

ANSWER: The original theory was to smooth out the business cycle. The political governments turned to the central banks and argued that they were responsible for the money supply. Therefore, it was allegedly their duty to control inflation irrespective of the spending of politicians. This was an inconvenient economic truth.

The problem is that the ONLY theory they have is the Keynesian Model. They really have no other theory to rely on. So they keep lowering rates, hoping to stimulate demand and are oblivious to the economic reality that the political side is hunting taxes and becoming more aggressive in tax enforcement. The two sides are clashing and the central banks are now TRAPPED with no alternative.

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

More Black Swans Arrive As U.S. Debt Balloons $800 Billion In Two Months

More Black Swans Arrive As U.S. Debt Balloons $800 Billion In Two Months

The rate at which black swans are showing up in the world should scare the hell out of people.  But, unfortunately, everyone seems to be lost in the highly complex technology of I-phones, computers, social media, and the telly to notice that something is definitely wrong.  The current situation reminds me of a famous scene in the Monty Python movie, The Holy Grail, where a guy is banging a bell and saying, “Bring out your dead.”  Let me explain.

The scene in the movie takes place in England or Europe during the Black Plague, and due to the staggering amount of deaths, carts were used to pick up the bodies throughout the city.  Yes, this is indeed a macabre subject matter, but Monty Python takes a serious situation and turns it into a comedy.  However, the point I am trying to make is this… death is a very tragic and emotional part of life that impacts family members, friends, and coworkers.  But, in this Monty Python scene, there is so much death, that it almost becomes numb to everyone.

And, that is precisely what I see now in the public. There are so many warning signs, or black swans, that no one seems to notice.  Everyone has become… QUITE NUMB to it all.  So, when the U.S. Government adds $814 billion of new debt in a little more than two months, the public yawns as this is no big deal:

Since the beginning of August, the total U.S. federal debt has increased from $22,023 billion to $22,837 billion.  Thus, the U.S. public debt has increased by nearly 4% in just two months!  Here is the debt table from TreasuryDirect.gov website since August 1st:

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

The Global Pastime Of Kicking The Can Down The Road

The Global Pastime Of Kicking The Can Down The Road 

Nowhere is the trend of kicking the can down the road more prevalent than in government. Consider this a tribute to politicians and governments everywhere that postpone and delay taking necessary actions. Frequently for politicians, the goal of being reelected takes priority over doing the right thing. This is why  those in office often surrender their better judgment as they go seeking jobs and economic growth at any cost.The idea of paying later for a hamburger today is very seductive for those in this state of mind.

This explains why we constantly see government bargaining with, and making concessions to companies like Amazon to locate facilities in their State. This is done to gain a few jobs with little thought to the long-term consequences. Sometimes it is exempting sales tax, sometimes it is giving the company free utility build-outs, forgiving property taxes, or seeing they are granted special pricing and privileges when it comes to delivering their goods. I use Amazon as an example because it uses all these methods to gain an advantage and exploit its competitors. Sadly, the toll Amazon takes on the brick and mortar stores that line the streets of our cities and neighborhoods is just now becoming apparent.

The sweet allure of getting and receiving the benefits while setting back the negatives is not new or is the desire from which it flows. Getting something for nothing is often the catalyst for bad policy. This is apparent in our healthcare system when it comes to the Affordable Care Act or what is still commonly known as Obamacare. After promises the ACA would lower healthcare costs while extending coverage to millions of Americans the decision was made to phase it in. 

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

We Finally Understand How Destructive Negative Interest Rates Actually Are

We Finally Understand How Destructive Negative Interest Rates Actually Are

We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.

We are slowly starting to understand how destructive negative interest rates actually are. Central banks control short-term interest rates in an economy by setting the rate banks receive on their deposits, that is, on the reserves they hold at the central bank. A new development is the control central banks now exert over long-term rates through their asset purchase, or “QE” programs.

Banks profit from the interest rate differential between “lending long” but “borrowing short”. Essentially, the difference between lending and deposit rates determine a bank’s profitability. However, with today’s very low interest rates, this difference becomes almost non-existent, and with negative rates, inverts completely.

When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.

However, the problems created by negative interest rates do not stop there. In 2008, an influential article describing the economic malaise in Japan after the financial crash of the early 1990s found that instead of calling-in or refusing to refinance existing debts, large Japanese banks kept loans flowing to otherwise insolvent borrowers.

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

US Gross National Debt Jumps by $1.2 Trillion in Fiscal 2019, to $22.7 Trillion, Hits 106.5% of GDP

US Gross National Debt Jumps by $1.2 Trillion in Fiscal 2019, to $22.7 Trillion, Hits 106.5% of GDP

But what happens if there’s actually a recession?

The US gross national debt jumped by $110 billion on the last two business days of Fiscal Year 2019, and by a breath-taking $1.2 trillion during the entire fiscal year, after having already jumped by $1.27 trillion in Fiscal 2018, the Treasury Department reported today. This ballooned the US gross national debt to a vertigo-inducing $22.72 trillion.

These beautiful trillions whipping by are a joy to behold: so much action in so little time. The flat spots in the chart below are the results of the debt-ceiling charade in Congress. When the debt ceiling is lifted, the debt spikes back to trend, and nothing changed:

During Fiscal 2019, the gross national debt increased by 5.6% and now amounts to 106.5% of current-dollar GDP, up from 105.4% at the end of Fiscal 2018.

The thing to remember here is that this isn’t the Great Recession or the Financial Crisis, when over 10 million people lost their jobs and credit froze up and companies went bankrupt and tax revenues plunged while outlays soared to pay for unemployment insurance and the like. This isn’t even the Collapse of Everything, but the longest expansion of the economy in US history.

Over the last four quarters, the US economy as measured by nominal GDP (not adjusted for inflation) grew by 4.0%. Over the same period, the US gross national debt grew by 5.6% (not adjusted for inflation).

In dollar terms, it looks even funnier: The economy as measured by nominal GDP over the past four quarters grew by $830 billion. The Gross National Debt grew by $1.2 trillion.

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

Liquidity Crisis & the Pending European Banking Crisis

Liquidity Crisis & the Pending European Banking Crisis 

A lot of people have been writing in about the liquidity crisis and the banks with exposure to Deutsche Bank. This is clearly the European Banking Crisis we have been warning about. Most European (and Swiss) banks are having to overpay 30-40bps over libor. Even A+ rated banks are having to pay this premium.

Keep in mind that the Lehman and Bear crisis took place in the REPO market. This is why the crisis is appearing in a market most never hear about or see in interest rates. Those in Europe who have a position in cash, it may be better to have shares or a private sector bond or US Treasury. Given the policy in Europe of no bailouts, leaving cash sitting in your account could expose you to risk in the months ahead.

In all honesty, if this explodes in Europe, no-one will be safe and it will be pot-luck who’s cash you will be holding when it hits the fan. The Fed will bailout the US banks, but it cannot get involved in bailing out the European banks. This is becoming a clash in public policy which all stems from the FAILUREto have consolidated the debts. That refusal to consolidate, the terms demanded by Germany, also precludes bailouts where the money would cross borders. They want to pretend this is one happy family, but they insist on separate accounts.

As one European banker put it in a private conversation, it is almost a calm collapse. As I have REPEATEDLY warned, we are facing scenarios that nobody has ever seen before. The interconnectivity runs so deep, this clash in public policies can result in a serious crisis emanating from Europe.

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

‘Vaguely Troubling’: BIS Warns Of Financial Disaster Amid $17 Trillion In Negative-Yield Debt

‘Vaguely Troubling’: BIS Warns Of Financial Disaster Amid $17 Trillion In Negative-Yield Debt 

When the central bank for central banks publishes its quarterly review, the world should take note.

Claudio Borio, Head of the Monetary and Economic Department at the BIS, published the BIS Quarterly Review, September 2019on Sunday, revealing how the increasing acceptance of negative interest rates has reached “vaguely troubling” levels. 

The statement comes after the Federal Reserve and European Central Bank (ECB) cut interest rates to flight a global manufacturing slowdown — Borio said that the effectiveness of monetary policy is severely waning and might not be able to counter the global downturn, in other words, JPMorgan Global Composite PMI might print sub 50 for a considerable period of time. 

“The room for monetary policy maneuver has narrowed further. Should a downturn materialize, monetary policy will need a helping hand, not least from a wise use of fiscal policy in those countries where there is still room for maneuver.”

The BIS, known as the ‘central bankers’ bank,’ said the recent easing by the Fed, ECB, and PBOC, has pushed yields lower across the world, contributing to the more than $17 trillion in negative-yielding tradeable bonds. 

From Germany to Japan, 10-year government debt rates have plunged into negative territory, in recent times. 

“Against this backdrop, sovereign bond yields naturally declined further, at times driven by the prospect of slower economic activity and heightened risks, at others by central banks’ reassuring easing measures. At one point, before the recent uptick in yields, the amount of sovereign and even corporate bonds trading at negative rates hit a new record, over USD 17 trillion according to certain estimates, equivalent to roughly 20% of world GDP. Indeed, some households, too, could borrow at negative rates. A growing number of investors are paying for the privilege of parting with their money. 

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

Use of “Hidden Debt Loophole” Spreads Among Australian Corporations

Use of “Hidden Debt Loophole” Spreads Among Australian Corporations

Situation already so bad that hiding debt becomes a priority?

Australian engineering group UGL, which is working on large infrastructure projects such as Brisbane’s Cross River Rail and Melbourne’s Metro Trains, recently sent a letter to suppliers and sub-contractors informing them that as of October 15, they will be paid 65 days after the end of the month in which their invoices are issued. The company’s policy had been, until then, to settle invoices within 30 days.

The letter then mentioned that if the suppliers want to get paid sooner than the new 65-day period, they can get their money from UGL’s new finance partner, Greensill Capital, one of the biggest players in the fast growing supply chain financing industry, in an arrangement known as “reverse factoring”. But it will cost them.

Reverse factoring is a controversial financing technique that played a major role in the collapse of UK construction giant Carillion, enabling it to conceal from investors, auditors and regulators the true magnitude of its debt.

Here’s how it works: a company hires a financial intermediary, such as a bank or a specialist firm such as Greensill, to pay a supplier promptly (e.g. 15 days after invoicing), in return for a discount on their invoices. The company repays the intermediary at a later date. This effectively turns the company’s accounts payable into debt that is owned a financial institution. But this debt is not disclosed as debt and remains hidden.

In its letter to suppliers, UGL trumpeted that the payment changes would “benefit both our businesses,” though many suppliers struggled to see how. One subcontractor interviewed byThe Australian Financial Reviewcomplained that the changes were “outrageous” and put small suppliers at a huge disadvantage since they did not have the power to challenge UGL. Some subcontractors contacted by AFR refused to be quoted out of fear of reprisal from UGL.

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

Former Head Of Plunge Protection Team Says Fed Has To Buy More Debt

Former Head Of Plunge Protection Team Says Fed Has To Buy More Debt

We have lift off.

Last Wednesday, as stocks hit session lows amid fears that the Fed was so polarized on further easing and with the Fed’s dot plot suggesting no more cuts this year that odds of further rate cuts in 2019 dropped precipitously, Chair Powell catalyzed a dramatic rebound in risk assets when during his press conference  he said that “It is certainly possible that we’ll need to resume the organic growth of the balance sheet sooner than we thought.

One day later, with the Fed engaging in overnight repos to unfreeze the clogged up plumbing in the repo market, the release of the Fed’s weekly H.4.1 statement confirmed that Powell was spot on: the Fed had indeed resumed the growth of the Fed’s balance sheet “sooner than we thought.” Whether or not said growth is “organic” is the topic of a separate discussion, but as expected the week’s rolling $75 billion overnight repo facility meant that the Fed’s balance sheet posted its first substantial increase for the first time since the end of QE3 in 2014, rising by $75 billion to $3.845 trillion.

The offsetting balance sheet liability was the Treasury General Account, or the cash the US Treasury holds at the Fed, which soared by a whopping $119 billion in one week, rising to $303 billion as of September 18, which increase frequent readers will recall, was precisely the catalyst we said at the start of August would precipitate a dollar shortage, and unleash a tantrum in the repo market. That’s precisely what happened.

Incidentally, we also said that since both overnight and term repos would be insufficient to resolve a problem that was ultimately a function of too few reserves in the system, that this would culminate with a return of open market purchases of securities by the Fed, i.e. QE. 

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

Our Energy and Debt Predicament in 2019

Our Energy and Debt Predicament in 2019

Many people are concerned that we have an oil problem. Or they are concerned about recession and the need to lower interest rates.

As I see the situation, we have a problem of a networked economy that is not functioning well. A big part of this problem is energy-related. Strange as it may seem, energy prices (including oil prices) are too low for producers. If debt levels were growing more rapidly, this low-price problem would go away. 

The “standard way” of encouraging more debt-based purchases is by lowering interest rates. But we are running out of room to do this now. We also seem to be running out of economic investments to make with debt. If expected returns on investment were greater, interest rates would be higher.

Without economic investments, demand for commodities of all kinds, including energy products, tends to stay too low. This is the problem we have today. Our debt problem and our energy problem are really different aspects of a networked economy that is no longer generating enough total return. History suggests that these periods tend to end badly.

In the following sections, I will explain some of the issues involved.

[1] Our problem is not just that oil prices that are too low. Prices are too low for practically every type of energy producer, and in many parts of the globe.

Oil: OPEC oil producers have cut back production because they view oil prices as too low. OPEC reports a cutback in production of 2.7 million barrels per day between November 2018 and July 2019 (from 32.3 million bpd to 29.6 million bpd).

In the US, there has been an increase in bankruptcies of oil producers during 2019, relative to 2018. There has also been a reduction in the number of oil drilling rigs of 17% since the week of November 16, 2018, according to reports by Baker Hughes. These are signs of producer distress.

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

The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)

The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)

The world has experienced a decade of growth fueled by record-low interest rates, a burgeoning money supply, and historic debt levels – but the good times only last so long. 

As the global economy slows and eventually begins to retract, can precious metals offer a useful store of value to investors?

Part 1: The Start of a New Cycle

Today’s infographic comes to us from Endeavour Silver, and it outlines some key indicators that precede a coming gold-silver cycle in which exposure to hard assets may help to protect wealth. 

The Start of a New Gold-Silver Cycle

Bankers Blowing Bubbles

Since 2008, central bankers around the world launched a historic market intervention by printing money and bailing out major banks. With cheap and abundant money, this strategy worked so well that it created a bull market in every sector — except for precious metals. 

Stock markets, consumer lending, and property values surged. Meanwhile, the U.S. Federal Reserve’s assets ballooned, and so did corporate, government, and household debt. By 2018, total debt reached almost $250 trillion worldwide. 

Currency vs. Precious Metals

The world awash in unprecedented amounts of currency, and these dollars chase a limited supply of goods. Historically speaking, it’s only a matter of time before the price of goods increases or inflates – eroding the purchasing power of every dollar. 

Gold and silver are some of the only assets unaffected by inflation, retaining their value.

Gold and silver are money… everything else is credit.

– J.P. Morgan

The Perfect Story for a Gold-Silver Cycle?

Investors can use several indicators to gauge the beginning of the gold-silver cycle:

  1. Gold/Silver Futures

    Most traders do not trade physical gold and silver, but paper contracts with the promise to buy at a future price. Every week, U.S. commodity exchanges publish the Commitment of Traders “COT” report. This report summarizes the positions (long/short) of traders for a particular commodity. 

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

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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