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Society is pretending its actions don’t have consequences. It’s badly mistaken.

History teaches us that there is no free lunch, reminds Dr. Ben Hunt, publisher of EpsilonTheory.com.

And science informs us that even the most simple systems become nearly impossible to predict or control with 100% precision as time and variables change.

But our society today is ignoring these lessons. It’s betting that the increasingly excessive distortions required to keep the status quo continuing will succeed, and come at no cost.

That’s a losing bet, warns Hunt:

Society burns itself on a really hot stove every three or four generations.
I think we’re at that point where the Millennials coming of age who are having to wrestle with what the Baby Boomers have done to the world. They’re going to end up burning themselves on this hot stove. The hot stove of looking to government as the answer for everything that ails you. Of looking towards your political leaders as somehow able to provide never-ending exponential growth in comfort and standard of living.
And ultimately, they’ll burn themselves — there’s no such thing as a free lunch. You’ve got pay for these things in one way or another — in terms of resource extraction, in terms of taxation, in the form of sacrifice of individual liberties.
There’s a price to be paid, though. That’s the hot stove that I’m talking about. That hot stove can manifest itself in war. That’s certainly happened in the past. It could manifest itself in the subordination or forfeit of individual liberties. That’s certainly happened in the past.
There are any number of ways in which that burning on the hot stove could happen.

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

If The Federal Reserve Cuts Interest Rates Now, It Will Be An Admission That A Recession Is Coming

July 30, 2019

If The Federal Reserve Cuts Interest Rates Now, It Will Be An Admission That A Recession Is Coming

So there is a lot of buzz that the Federal Reserve is about to cut interest rates – and it might actually happen. We’ll see. But if it does happen, it will directly contradict the carefully crafted narrative about the economy that the Federal Reserve has been perpetuating all this time. Fed Chair Jerome Powell has repeatedly insisted that the U.S. economy is in great shape even when there has been a tremendous amount of evidence indicating otherwise. And of course President Trump has been repeatedly telling us that this is “the greatest economy in the history of our country”, but now he is loudly calling for the Federal Reserve to cut interest rates as well. Something doesn’t seem to add up here. If the U.S. economy really was “booming”, there is no way that the Fed should cut interest rates. Right now interest rates are already low by historical standards, and theoretically it is during the “boom” times that interest rates should be normalized. But if the U.S. economy is actually slowing down and heading into a recession, then a rate cut would make perfect sense. And if that is the reality of what we are facing, then the economic optimists have been proven dead wrong, and people like me that have been warning of an economic slowdown have been proven right.

If the talking heads on television are correct, we’ll probably see a rate cut. In fact, apparently there are some people that are even pushing “for a 50 basis point cut”…

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

Hilarious How Wall-Street Crybabies Whine about the Fed’s QE Unwind after a Decade of “Wealth Effect”

November 9, 2018

Hilarious How Wall-Street Crybabies Whine about the Fed’s QE Unwind after a Decade of “Wealth Effect”

Their “Everything Bubble” is being pricked “gradually,” and they don’t like it.

Wall Street has been moaning, groaning, and crying out loud about the Fed’s current monetary policies – raising rates and unwinding QE. They fear that these policies will undo the Fed’s handiwork since the onset of QE and zero-interest-rate policy in 2008, now called the “Everything Bubble” (stocks, bonds, “leveraged loans,” housing, commercial real estate, classic cars, art…). In an effort to pressure the Fed to back off, they’re accusing the Fed of making a “policy mistake” and creating “scarcity” of bank reserves.

Here is Bloomberg News this morning. It’s really cute how this works. This is how the article starts out: “Fixed-income traders are telling the Federal Reserve that it might end up making a big policy mistake.”

These folks cannot say that the Fed’s QE unwind and higher rates might unwind some of the wealth of asset holders that resulted from the Fed’s desired “wealth effect.” That would be too clear. So they have to come up with hoary theories to back their “policy mistake” theme. This time it’s the theory of a “scarcity of bank reserves.”

When these folks talk about “scarcity,” what they mean is that they have to pay a little more. In this case, banks are having to pay more interest to attract deposits.

For the crybabies on Wall Street, that’s “scarcity.” For savers, money-market investors, and short-term Treasury investors, however, it means the era of brutal interest rate repression has ended, and that they’re earning once again more than inflation on their money (savers might have to shop around).

But that the money from depositors is suddenly not free anymore is anathema on Wall Street. So here we go – this time specifically targeting the QE unwind. Bloomberg:

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

The Weighted Average Cost Of Capital

October 18, 2018

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The Weighted Average Cost Of Capital

When it goes up, prices go down. It’s going up…

This is a revisitation of a report I wrote back in late 2016, predicting the imminent end of zero-bound interest rates and warning of the downward pressure that rising rates, mathematically, must place on today’s elevated asset prices.

Since the publication of that report, interest rates have indeed vaulted higher. Look at how the 3-month US Treasury yield has exploded since the start of 2017:

A Little Background

When I was fresh out of college in the mid-90s, I landed a job at Merrill Lynch. I was an “investment banking analyst”, which meant I had no life outside of the office and hardly ever slept. I pretty much spoke, thought, and dreamed in Excel during those years.

Much of my time there was spent building valuation models. These complicated spreadsheets were used to provide an air of quantitative validation to the answers the senior bankers otherwise pulled out of their derrieres to questions like: Is the market under- or over-valuing this company? Can we defend the acquisition price we’re recommending for this M&A deal? What should we price this IPO at?

Back then, Wall Street still (mostly) believed that fundamentals mattered. And one of the most widely-accepted methods for fundamentally valuing a company is the Discounted Cash Flow (or “DCF”) method. I built a *lot* of DCF models back in those days.

I promise not to get too wonky here, but in a nutshell, the DCF approach projects out the future cash flows a company is expected to generate given its growth prospects, profit margins, capital expenditures, etc. And because a dollar today is worth more than a dollar tomorrow, it discounts the further-out projected cash flows more than the nearer-in ones. Add everything up, and the total you get is your answer to what the fair market value of the company is.

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

We Witnessed The 3rd Largest Point Crash In Stock Market History On The Same Day That The 3rd Most Powerful Hurricane To Ever Hit The U.S. Made Landfall

October 12, 2018

We Witnessed The 3rd Largest Point Crash In Stock Market History On The Same Day That The 3rd Most Powerful Hurricane To Ever Hit The U.S. Made Landfall

If you don’t believe in “coincidences”, what are we supposed to make of this? On Wednesday, the 3rd most powerful hurricane to ever hit the United States made landfall in the Florida panhandle. Entire communities were absolutely shredded as Hurricane Michael came ashore with sustained winds of 155 miles per hour. You can find the entire article that I just posted about this massive storm right here. In this article, I am going to focus on what just happened on Wall Street. At the exact same time that Hurricane Michael was causing chaos in the Southeast, an October stock market crash was causing havoc in the Northeast. The Dow Jones Industrial Average was down 831 points, which was the 3rd largest single day point crash in stock market history. Of course it isn’t as if we hadn’t been repeatedly warnedthat this was coming, and the truth is that it looks like this is only the start of the financial shaking.

In fact, international financial markets are in a state of chaos as I write this article. Asian markets are a sea of red, and at this moment Dow futures are way down.

So it appears likely that Wednesday’s nightmare may extend into Thursday as well.

But before we look ahead too much, let’s talk about the utter carnage that we just witnessed.

According to Bloomberg, the 500 wealthiest people in the world lost 99 billion dollars on Wednesday…

Plunging global markets lopped $99 billion from the fortunes of the world’s 500 wealthiest people on Wednesday, the year’s second-steepest one-day drop for the Bloomberg Billionaires Index.

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

Ron Paul Is Warning That A 50% Stock Market Decline Is Coming – And That There Is No Way To Stop It

October 8, 2018

Ron Paul Is Warning That A 50% Stock Market Decline Is Coming – And That There Is No Way To Stop It

Is Ron Paul about to be proven right once again? For a very long time, Ron Paul has been one of my political heroes. His willingness to stand up for true constitutional values and to keep saying “no” to the Washington establishment over and over again won the hearts of millions of American voters, and I wish that there had been enough of us to send him to the White House either in 2008 or in 2012. To this day, I still wish that we could make his classic work entitled “End The Fed” required reading in every high school classroom in America. He was one of the few members of Congress that actually understood economics, and it is very sad that he has now retired from politics. With the enormous mess that Washington D.C. has become, we sure could use a lot more statesmen like him right now.

But even though he has retired from politics, Ron Paul is still speaking out about the most important issues of the day. And what he recently told CNBC is extremely ominous.

The following comes from a CNBC article entitled “Ron Paul: US is barreling towards a stock market drop of 50% or more, and there’s no way to prevent it”…

According to the former Republican Congressman from Texas, the recent jump in Treasury bond yields suggest the U.S. is barreling towards a potential recession and market meltdown at a faster and faster pace.

And, he sees no way to prevent it.

Of course lots of such predictions are flying around these days.

In fact, at this point even the IMF is warning of a “second Great Depression”.

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

If You Read Between The Lines, Global Economic Leaders Are Telling Us Exactly What Is Coming

August 22, 2018

If You Read Between The Lines, Global Economic Leaders Are Telling Us Exactly What Is Coming

Sometimes, a strongly-worded denial is the most damning evidence of all that something is seriously wrong. And when things start to really get crazy, “the spin” is often the exact opposite of the truth. In recent days we have seen a lot of troubling headlines and a lot of chaos in the global financial marketplace, but authorities continue to assure us that everything is going to be just fine. Of course we witnessed precisely the same thing just prior to the great financial crisis of 2008. Federal Reserve Chair Ben Bernanke insisted that a recession was not coming, and we proceeded to plunge into the worst economic downturn since the Great Depression. Is our society experiencing a similar state of denial about what is ahead of us here in 2018?

Let me give you a few examples of some recent things that global economic leaders have said, and what they really meant…

–Tesla Motors CEO Elon Musk: “We are definitely not going bankrupt.”

Translation: “We are definitely going bankrupt.”

Tesla is a company that is supposedly worth 51 billion dollars, but the reality is that they are going to zero. They have been bleeding massive amounts of cash for years, and now a day of reckoning has finally arrived. A severe liquidity crunch has forced the company to delay payments or to ask for enormous discounts from suppliers, and many of those suppliers are now concerned that Tesla is on the verge of collapse…

Specifically, a recent survey sent privately by a well-regarded automotive supplier association to top executives, and seen by the WS , found that 18 of 22 respondents believe that Tesla is now a financial risk to their companies.

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

Ron Paul Warns That When The “Biggest Bubble In The History Of Mankind” Bursts It Could “Cut The Stock Market In Half”

July 16, 2018

Ron Paul Warns That When The “Biggest Bubble In The History Of Mankind” Bursts It Could “Cut The Stock Market In Half”

When this bubble finally bursts, will we witness the biggest stock market crash in U.S. history? “The bigger they come, the harder they fall” is a well used phrase, but I think that it is very appropriate in this case. From a low of 6,443.27 on March 6th, 2009, we have seen the Dow nearly quadruple in value since the last financial crisis. It has been a remarkable run, and it has lasted far longer than virtually any of the experts anticipated. But what goes up must come down eventually. This stock market bubble was almost entirely fueled by easy money from the Federal Reserve, and now that easy money has been cut off. The insiders can see the handwriting on the wall and they are getting out of the market at a pace that we haven’t seen since 2008. Could it be possible that the day of reckoning is finally at our door?

Of course we have been hearing warnings like this for a very long time. In fact, I have been warning about a market crash for a very long time. Just the other day, one of my readers insisted that if something was going to take place that “it would have happened by now”. In the Internet age, we have been trained to have very short attention spans, but financial bubbles don’t care about the length of our attention spans. They all inevitably come to a bitter end, but they don’t reach that end until they are good and ready.

And without a doubt we are on borrowed time, but meanwhile so many of us that are continually warning about what we are facing are getting a lot of heat for it.

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

18 Times The Fed Has Gone Through A Rate Hiking Cycle, And 18 Times It Has Caused A Huge Stock Market Decline And/Or A Recession

June 8, 2018

18 Times The Fed Has Gone Through A Rate Hiking Cycle, And 18 Times It Has Caused A Huge Stock Market Decline And/Or A Recession

Since 1913, the Federal Reserve has engaged in 18 distinct interest rate hiking campaigns, and in every single one of those instances the end result was a large stock market decline, a recession, or both. Now we are in the 19th rate tightening cycle since 1913, but many of the experts are insisting that things will somehow be different this time. They assure us that the U.S. economy will continue to grow and that stock prices will continue to soar. Of course the truth is that if something happens 18 times in a row, there is a really, really good chance that it will happen on the 19th time too. For years I have been trying to get people to understand that our country has been on an endless roller coaster ride ever since the Fed was created back in 1913. Things can seem quite pleasant when the economy is on one of the upswings, but the downswings can be extremely painful.

It was economist Lance Roberts that pointed out this correlation between rate hiking cycles and economic troubles. When I came across his most recent article, it really got my attention…

A sustained interest rate hiking campaign, as undertaken by the Fed, has always resulted in negative stock market returns.

Always. Not usually, not might-be-correlated-to. Always. As in, 18 out of 18 times. Until now. When we’ve had the single highest percentage increase in history (93.33% peak to trough, so far).

To support his claims, he posted this chart…

So far, however, there hasn’t been a huge stock market drop or a recession during this rate hiking cycle.

Has something changed?

Is the 19th time going to be fundamentally different?

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

Why India’s Surprise Rate Hike May Lead To The Next Emerging Market Crisis

June 6, 2018

Why India’s Surprise Rate Hike May Lead To The Next Emerging Market Crisis

Following RBI governor Urjit Patel’s Op-ed earlier this week, in which he lamented the growing dollar shortage as a result of the Fed’s ongoing tightening, it is perhaps not surprising that this morning India became the latest central bank to “surprise” markets with an unexpected rate hike as the country did everything it could to if not prevent, then delay the capital outflow Patel hinted at.

And it was a “surprise”, because only a third, or 14 of 44 economists surveyed by Bloomberg, predicted the RBI would hike the repurchase rate by 25 bps to 6.25%, as it did, with the rest predicting an unchanged announcement.

To be sure, the decision was welcomed domestically, where inflation has been trending higher, and Economic Affairs Secretary Subhash Chandra Garg said in a twitter post that he Welcomes the “monetary policy statement. Quite balanced assessment of growth, inflation and external situation and expectations.”

The market was a bit more tempered, although after an confused initial reaction to the hike in the INR, which first jumped, the slumped, it eventually closed near session highs, just as the RBI had intended.

The desired response may not last, however.

In a note by Bloomberg’s Abhishek Gupta, the economist writes that the rate hike may not help the rupee, because as a standard rule of thumb, while raising interest rates attracts capital inflows, causing the local currency to appreciate, this is generally only true for developed economies, and doesn’t necessarily hold for emerging markets, where capital typically doesn’t have free mobility. For that reason, a rate hike by the Reserve Bank of India “would likely add to downward pressure on the rupee, which is already suffering from higher crude oil prices.”

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

Central Banks Put a Safety Net Under Financial Markets

January 29, 2018

Central Banks Put a Safety Net Under Financial Markets

Most early business cycle indicators suggest that the global economy is pretty much roaring ahead. Production and employment are rising. Firms keep investing and show decent profits. International trade is expanding. Credit is easy to obtain. Stock prices keep moving up to ever higher levels. All seems to be well. Or does it? Unfortunately, the economic upswing shows the devil’s footprints: central banks have set it in motion with their extremely low, and in some countries even negative, interest rate policy and rampant monetary expansion.

Artificially depressed borrowing costs are fueling a “boom.” Consumer loans are as cheap as ever before, seducing people to spend increasingly beyond their means. Low interest rates push down companies’ cost of capital, encouraging additional, and in particular risky investments – they would not have entered into under “normal” interest rate conditions. Financially strained borrowers – in particular states and banks – can refinance their maturing debt load at extremely low interest rates and even take on new debt easily.

By no means less important is the fact that central banks have effectively spread a “safety net” under financial markets: Investors feel assured that monetary authorities will, in case things turning sour, step in and fend off any crisis. The central banks’ safety net has lowered investors’ risk concern. Investors are willing to lend even to borrowers with relatively poor financial strength. Furthermore, it has suppressed risk premia in credit yields, having lowered firms’ cost of debt, which encourages them to run up their leverage to increase return on equity.

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

The Waiting Is The Hardest Part

October 5, 2017

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The Waiting Is The Hardest Part

Tom Petty’s anthem for today’s investors

Man, what an awful stretch of events.

When I penned last week’s article on tragedy, little did I expect something as horrible as the Las Vegas massacre would immediately follow. And nearly lost in the headlines was the untimely passing of rock legend, Tom Petty, one of my all-time favorite musicians. Sure can’t wait for this week to be over…

In memory of Tom, I’ve been listening to a lot of his and the Heartbreakers’ best hits. The lyrics to one song in particular, The Waiting, well-captures an important message today’s investors should take to heart:

The waiting is the hardest part

Don’t let it kill you baby, don’t let it get to you

Those waiting for the financial markets to experience some sort (any sort!) of pullback have been waiting a long, looong time. How long?

It has been over 100 months (more than 8.5 years) since the current bull market began in April of 2009
It has been 15 months since the last (and very brief) drop of 5% in the S&P 500
This past September saw record low volatility, including a stretch now claimed to be “the most peaceful days in the history of the markets”
Since last year’s presidential election, at which point the markets were already considered dangerously overvalued, the Dow Jones Industrial Average is up over 20%
As of this article’s publishing, the Dow, the S&P and the NASDAQ are all trading at record highs

Or, to put it visually:

The stock market is now 70% higher than it was at the previous bubble peak immediately preceding the 2008 Great Financial Crisis.

Reflect for a moment how painful the crash from Oct 2008-March 2009 was. How much more painful will a crash from today’s much dizzier heights be?

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

The Globalists Are Systematically Destroying America’s Middle Class

October 2, 2017

The Globalists Are Systematically Destroying America’s Middle Class

When people are dependent on the government they are much easier to control. We are often told that we are not “compassionate” when we object to the endless expansion of government social programs, but that is not how the debate should be framed. In America today, well over 100 million people receive money from the federal government each month, and the number of Americans that are truly financially independent is continually shrinking. In fact, only 25 percent of all Americans have more than $10,000 in savings right now according to one survey. If we eventually get to the point where virtually all of us are dependent on the government for our continued existence, that would give the globalists a very powerful tool of control. In the end, they want as many of us dependent on the government as possible, because those that are dependent on the government are a lot less likely to fight against their agenda.

Back in 1992, the bottom 90 percent of American income earners brought in more than 60 percent of the country’s income. But last year that figure slipped to just 49.7 percent. The wealth of our society is increasingly being concentrated at the very top, and the middle class is steadily being eroded. Surveys have found that somewhere around two-thirds of the country is living paycheck to paycheck at least part of the time, and so living on the edge has become a way of life for most Americans.

Earlier today, I came across a Business Insider article that was bemoaning the fact that the U.S. economy seems to be rather directionless at this point…

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

Debt Nightmare: Does Anyone Actually Care That Our Exploding National Debt Is Destroying Our Future?

September 12, 2017

Debt Nightmare: Does Anyone Actually Care That Our Exploding National Debt Is Destroying Our Future?

When will America finally wake up? The borrower is the servant of the lender, and we now have a colossal 20 trillion dollar chain around our collective ankles. We have willingly enslaved ourselves, our children and our grandchildren, and yet our addiction is so insatiable that we continue to add more than 100 million dollars to our debt load every single hour of every single day. The national debt is sitting at a grand total of $20,162,176,797,904.13 at this moment, but now that the debt ceiling has been lifted that number is expected to shoot up very rapidly toward 21 trillion dollars by the end of the year. The national debt had been held down by accounting tricks to keep it under the debt limit for many months, but every time this has happened before we have seen the national debt absolutely explode back to projected levels once the debt ceiling was raised.

But very few of our “leaders” in Washington seem to care that we are in the process of committing national suicide. There is no possible way that we will be able to continue to be the most powerful economy on the planet if we continue down this road. During Obama’s eight years in the White House, we added more than 9 trillion dollars to the national debt. That certainly improved things in the short-term, because if we could go back and take 9 trillion dollars out of the economy over the past 8 years we would be in an absolutely nightmarish economic depression right now.

But even with all of this borrowing and spending, our economy has still only grown at an average rate of just 1.33 percent a year over the last 10 years.

And by going into so much debt, we are literally destroying the future for our children and our grandchildren.

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

Bank of Canada Raises Interest Rates… Again

September 6, 2017

Bank of Canada Raises Interest Rates… Again

For the second time in less than two months, the Bank of Canada has raised interest rates.

On Wednesday, the central bank raised its overnight lending rate by a quarter per cent to 1 per cent.

The move surprised many who weren’t expecting a rate increase until later this Autumn.

Just like last time, the rationale behind higher rates was centred around the Bank of Canada’s belief that the economy is growing faster than expected.

Bank of Canada Governor Stephen Poloz said, “The level of GDP growth is now higher than the bank expected.”

Of course, this assumes that GDP measures anything.

The Canadian loonie surged after the announcement, climbing to 82 cents U.S.

The decision reinforces the message that easy money and low-interest rates are coming to an end. Of course, the bursting of Canada’s real estate bubble could reverse direction for the bank, using these recent rate gains as leverage to cut rates in order to “stimulate” the deflating economy.

But until then, analysts are expecting more rate hikes since many have confused consumer indebtedness and rising prices as economic strength.

The Bank of Canada won’t confirm these predictions since, according to the central bank’s statement, price controls on interest rates are, “predetermined and will be guided by incoming economic data and financial market developments.”

Of course, the Bank of Canada isn’t clueless when it comes to higher rates and indebted Canadian households. In the rate hike statement, the bank promised that “close attention will be paid to the sensitivity of the economy to higher interest rates,” given “elevated household indebtedness.”

The bank’s next scheduled rate-setting is Oct. 25.

All in all, today’s announcement puts interest rates back to where they were in January 2015, before Poloz made two surprising “emergency rate cuts” to deal with falling oil prices.

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