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Brodsky: This Is A Red Flag Warning
Brodsky: This Is A Red Flag Warning
Authored by Paul Brodsky via Macro-Allocation.com,
Red Flag Warning
Two identifiable dynamics may signal significant market shifts imminently:
1. The US debt ceiling will be debated soon and signs point towards a messy outcome.
2. Recent economic data have been weak, confirming our thesis that US economic growth is slowing and will not be reversed until a recession is acknowledged.
Debt Ceiling
Excessive debt has a way of catching up with people and institutions, and the first true test for the US government may be at hand. Congress was expected to raise the debt ceiling by October or else Treasury could not fund all the government’s programs and current obligations. Yet talk of Trump tax reform in 2016 may have given taxpayers incentive to defer their liabilities. As a result, Treasury received about 3 percent less in revenues than expected, accelerating the timetable to debate and raise the debt ceiling.Progress on raising the ceiling will unlikely be made in August, as Congress is in recess.
Meanwhile, the political atmosphere in the Republican Party has splintered further under President Trump. The conservative wing, which tried to block raising the ceiling in the past, has signaled it will again dig in its heels to force the government to begin balancing its budget. Though it caved in the past, the conservative caucus’ resolve should not be doubted this time, judging by its will and ability to so far block health care reform that does not absolutely repeal the Affordable Care Act.
Treasury Secretary Mnuchin has stated that the Department has options if Congress does not raise the ceiling, but has not been forthcoming with specifics. If a cash flow shortfall develops in the fourth quarter, principal and interest payments on Treasury debt would be prioritized so that the government would avoid default.
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Populism In Our Time – “The Status Quo Is The Fundamental Problem”
Populism In Our Time – “The Status Quo Is The Fundamental Problem”
“Be even more suspicious…of all those who employ the term we or us without your permission. This is another form of surreptitious conscription, designed to suggest that we are all agreed on our interests and identity.”
– Christopher Hitchens
Merriam-Webster defines populist as “a believer in the rights, wisdom and virtues of the common people”, and when the word is capitalized: “a member of a U.S. political party formed in 1891 primarily to represent agrarian interests and to advocate the free coinage of silver and government control of monopolies”. The first definition seems to be the very point of representative government; the latter what happens when representative government is no longer representative.
The use of the word “populist” among professional politicos implies an off-the-run candidate or leader with ill-intent – an irreverent voice deigning to challenge established institutions by speaking directly to the deplorable rabble, bypassing the narrative perpetuated by vast political and media infrastructures. Those inclined towards transitive logic might infer that governments and the Fourth Estate propose, but are not structured and do not work, to serve the rights, wisdom and virtues of commoners.
We won’t get idealistic about democracy or the gaping separation between political rhetoric and execution. In non-revolutionary times (about 99.9% on a timeline) governments serve the privileged. It is what they do. Political leaders throw bones to commoners, providing bread, circuses and welfare – distractions eminently better than brioches chucked at them by Marie Antoinette, but decidedly worse than most people’s conception that their government abides by the principle of equal access for all.
Liberal democracies are like major medical insurance policies. They will, in the end, protect freedom and most liberties, but they do not provide preventative health care. (Indeed, as their promotion of systemic debt shows, they are not above distributing the fiscal equivalent of cigarettes to their citizens.)
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Shuffling The Deckchairs On The USS Perpetual Growth
Shuffling The Deckchairs On The USS Perpetual Growth
“Full speed ahead” Skipper Yellen barked to her economates, unperturbed by ominous radar images or the uselessness of econometric expertise at the zero bound, unmindful of passenger dysentery because 95.1% of the ship’s births were full.
“Look at all this liquidity!” she likely informed Captain Blithely, her commander in chief on shore, who had spent his presidency too disengaged of economic matters (or too politically astute) to have a cogent public thought on the matter, or perhaps smart enough to figure out everyone in Washington answers to the banks and that fixing their collateral damage social programs would be the best he could hope to do.
Indeed, the Fed Chair had gone rogue among her peers, charting her central bank’s shipping lane on a divergent path from her counterparts, Draghi and Kuroda, who were steering their monetary fleets to port. Captain Yellen seemed oblivious to the economic (and rhetorical) dangers of relying on consumption: an economy should not be beholden to eating its own productive cells.
We have argued there could be only one reason the Fed would want to hike rates: it is now responsible for US dollar policy and it wants a strong one to weaken other currencies, to prop up exporting economies, and to attract global capital and deposits to the US. Alas, the wind just died – not just for the US, but for all ships at sea.
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What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time
What If There Is No “Fed Put” – Paul Brodsky Thinks Yellen Will Not Bailout Markets This Time
Yet one person who is far less sanguine abou the latest in a long series of central bank bailouts of the stock market is Macro-Allocation’s Paul Brodsky, who believes that instead of the Fed Put, the time of the Fed Call has come.
Here’s why:
The Fed Put CallInvestors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016.
The Fed knows exactly what it’s doing.
Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more.
Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree. The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt.
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